What’s a Home Equity Loan?

By May 19, 2016Mortgage 101

Home-equity loans are often referred to as second mortgages. They allow you to leverage the equity in your home to secure cash or a line of credit.

There are two types of home-equity loans. Both are available with terms that typically range from five to 15 years. While both have their differences, they are similar in one very important way – each is required to be repaid in full in the event you sell your home.

The two types of home-equity loans include:

Fixed-Rate Loans
When you take out a fixed-rate home-equity loan, you receive a lump sum. The cost of such a loan is determined by a pre-agreed-upon interest rate. Like a conventional loan, your monthly payment will be the same over the entire lifespan of your loan.

Home-Equity Line of Credit
A home-equity line of credit is similar to a credit card. Some of them even come with one. When you take out a home-equity line of credit, you are pre-approved for a specific spending limit. You can draw on that sum as needed. What’s the cost of these loans? It varies. They are what’s called a variable-rate loan. The monthly payment varies based on the amount you’ve borrowed and the current interest rate.

Both of these loan types offer you a variety of benefits, including:

Access Your Home’s Equity

While you may have built up a lot of equity in your home, accessing that wealth without selling your home can be difficult. A home-equity loan is one of the ways to liquefy this wealth.

Tax Deductions

You can borrow up to $100,000 and still deduct all the interest paid on your home-equity loan.

Like any line of credit, home-equity loans aren’t without their potential hiccups. It’s important not to fall into a perpetual spending and borrowing cycle that can cause you to sink deeper into debt. As with any loan, you need to make sure your budget can support making the monthly payments.

Interested in learning more about home-equity loans? Give me a call today today.

 

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