What Is a Home Equity Loan?

Many homeowners use the equity in their homes to secure a loan from the bank. These loans have many financial advantages; they have flexible uses and often have low interest rates. Home equity loans are a popular choice for homeowners who want to pay for home improvement projects, medical bills or other large expenses.

Securing a loan

In order to obtain a home equity loan, one must have a suitable amount of equity in the home. Home equity is the fair market value of the home minus any mortgages or liens against the property. A home appraisal is done by the lending institution to verify the property's value and to determine the size of the home equity line. This loan is applied for in a similar manner to most loans and does have closing costs. Oftentimes, the closing costs are rolled into the overall amount of the loan.

Types of loans

There are two main types of home equity loans. There is a fixed-rate loan that works the same way as a mortgage; it is paid off over time at a predetermined interest rate. Secondly, there is a home equity line of credit; this is a revolving account and the rates are variable. This account is flexible, and the borrower is not required to use the full amount of the credit line. The term of the loan is fixed, and when the term expires, the homeowner must fully repay any outstanding debt.

Financial advantages

Unlike other types of loans, the interest on home equity loans is tax deductible.This makes them a popular choice for homeowners. Also, the lending terms and interest rates are favorable. Home equity loans are a good way for homeowners to either consolidate debt with a lower interest rate or to perhaps make much-needed home improvements.

Home equity loans allow homeowners to tap into their home equity to get cash. With favorable lending terms, tax advantages and borrowing flexibility, these loans are attractive to homeowners who are looking to pay for college, medical bills or to make home improvements.