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Home Equity Loans

Posted by  on Apr 16, 2009
 
Some people might be low on their money might be looking at taking out a mortgage. If you need to borrow money, home equity loans might be one useful source of credit. They may provide you with large amounts of cash at relatively low interest rates and they may provide you with certain tax advantages unavailable with other kinds of loans. A home equity loan is a type of loan in which the borrower uses the equity in their home as collateral. These loans are sometimes useful for families to help finance major home repairs, medical bills or college educations.

Keep in mind that a home equity loan creates a lien against the borrower's house. Home equity loans are most commonly second position liens, although they can be held in first or, less commonly, third position. Most home equity loans require good to excellent credit history, and reasonable loan-to-value and combined loan-to-value ratios. Home equity loans come in two types, closed end and open end. Home equity loans and lines of credit are usually, but not always, for a shorter term than first mortgages. In the United States, it is sometimes possible to deduct home equity loan interest on one's personal income taxes.

This is known as a revolving credit loan, also referred to as a home equity line of credit, where the borrower can choose when and how often to borrow against the equity in the property, with the lender setting an initial limit to the credit line based on criteria similar to those used for closed-end loans. Like the closed-end loan, it may be possible to borrow up to 100% of the value of a home, less any liens.

These lines of credit are usually available up to thirty years, usually at a variable interest rate. The minimum monthly payment can be as low as only the interest that is due. The borrower receives a lump sum at the time of the closing and cannot borrow further.

The maximum amount of money that can be borrowed is determined by variables including credit history, income, and the appraised value of the collateral, among others. Additionally, home equity lines of credit require you to use your home as collateral for the loan. This may put your home at risk if you are late or cannot make your monthly payments.

Also, there are other ways to borrow money from a lending institution. For example, you may want to explore second mortgage installment loans. Although these plans also place an additional mortgage on your home, second mortgage money usually is loaned in a lump sum, rather than in a series of advances made available by writing checks on an account. Also, second mortgages usually have fixed interest rates and fixed payment amounts.

Those loans with a large final (balloon) payment may lead you to borrow more money to pay off this debt, or they may put your home in jeopardy if you cannot qualify for refinancing. If you sell your home, most plans require you to pay off your credit line at that time.

In addition, because home equity loans give you relatively easy access to cash, you might find you borrow money. Also, you might want to explore borrowing from credit lines that do not use your home as collateral. These are available with your credit cards or with unsecured credit lines that let you write checks as you need the money.

Also, closed-end home equity loans generally have fixed rates and can be amortized for periods usually up to 15 years. Some home equity loans offer reduced amortization whereby at the end of the term, a balloon payment is due. These larger lump-sum payments can be avoided by paying above the minimum payment or refinancing the loan.

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