A home equity loan can be used to fund any personal expense, from college tuition costs to a family vacation. As with any other debt, it is important to be informed before taking out a home equity loan, so you can successfully manage your finances. Below are six terms to be familiar with when researching home equity loans.
Home Equity Loan - A loan made against the equity a borrower has in their house, often, referred to as a second mortgage. Borrowers take out home equity loans to fund household remodeling projects, tuition costs, medical bills, or other personal expenses.
Home Equity Line of Credit - A line of credit established using a borrower's home as collateral. A borrower can take money from their credit line, up to an established credit limit, for a set period of time. Like credit cards, home equity credit lines often have minimum monthly payments.
Unsecured Debt - A type of debt that is not backed by collateral in the event that a borrower defaults. Examples of unsecured debt include student loans, personal loans, and credit card debt.
Secured Debt - A type of debt that is supported by collateral if the borrower fails to repay what is owed. Examples of secured debt are mortgages and auto loans, in which a lender will take possession of a house or a car if the borrower defaults.
Fixed Rate - An interest rate that is set at the time a loan is originated and remains the same throughout the entire term of the loan.
Variable Rate - An interest rate that fluctuates with the market throughout the term of a loan. Variable interest rates are sometimes referred to a floating or adjustable rates.
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Home equity, which can also be referred to as real property value, is the difference between what is still owed by a person on a mortgage loan, and the market value of the house. If the home value goes up, or the home owner makes a huge payment on the house, then the home equity increases. Likewise, it can depreciate if home values drop. Many home owners who have excellent credit take advantage of this by taking out a home equity loan.
Equity loans on a house borrow against the perceived equity value that a person has in his or her house. These loans often require near perfect credit, are limited by home values, and are considered a secured debt, specifically because it borrows against the actual property, as opposed to the property owner. If the mortgage or payment is defaulted on, the bank can actually sent the house into foreclosure. Unsecured loans, on the other hand, the borrower can be held personally responsible for, like student loans.
Different banks will have different offers when getting the money to you. Typically in a house equity loan, it is a private loan with a fixed interest rate, the money is delivered in a lump sum, and it takes a great deal of time to process all of the personal information. However, for house owners that need instantaneous funding, some agents might offer fast, direct loans, but with a higher interest rate.
Before taking out any loans, make sure to do some research online about all of your options. Because there are so many options available out there, it is worth taking the time to be well versed on the subject.