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Is a New Home Equity Loan Right for You?

Equity refers to the monetary investment in an asset, whether or not the asset is real estate. Home equity is the amount of actual home ownership built up as the property appreciates in value and the home owner pays the monthly mortgage payment. Essentially, it is the current market value of the home less the mortgage balance.

One of the financial advantages of home ownership is having the option to use home equity built up in the property as collateral for borrowing money. However, the decision to take on the debt of a home equity loan, or HEL, requires you to get cash advances from personal cash advance.

Even though the equity built up in a home may generate a large sum of necessary cash, the loan must be repaid. At risk is the property that will be forfeited to the lender if the loan is not repaid.

Mechanics of a Home Equity Loan

A bank, a mortgage company, or other lending institution determines how much of the equity they will lend based on several factors. Considerable weight goes to the current market value of the home and the risk involved in lending the money. The lender needs to be reasonably certain that, should the borrower default, they'll be able to sell the property for at least the amount they're lending.

A HEL may take the form of a second mortgage that produces a lump-sum of money that is to be repaid in fixed monthly installments over 10 to 15 years. Typically, the home owner will lock in a fixed rate. The loan may also take the form of a home equity line of credit, or HELOC. The HELOC functions like a credit card, but the rate is lower because, unlike an unsecured commercial credit card, the loan is secured with the home owner's property.

Avoiding Negative Equity

When taking out a HEL, the homeowner should avoid borrowing more money than can be paid back by selling the property. You want to avoid creating a negative equity situation in which you are upside down, or under water, with the loan.

HEL or HELOC?

Deciding whether to borrow a traditional HEL or a HELOC depends on the individual situation. Consideration must be given to financial and personal goals, ability to repay the loan as agreed, typical spending habits, and the amount of risk the home owner can handle.

Typically, a traditional HEL is a good choice for purchasing goods or services that have long-lasting benefits and for which payment is due in full at once. On the other hand, HELOCs are good for financing needs that arise unexpectedly and can be paid back in a relatively short period of time.

Proceed with caution, however, if the reason for taking out a HEL or HELOC is to help pay for years of living beyond means. Without making appropriate changes in spending habits, you should probably think twice, or perhaps thrice, about putting your shelter at risk.