Home owners can borrow against the equity built up in their homes with a home equity loan, or HEL. Two types of HEL are offered by lending institutions. One is the traditional, or second mortgage, type, and the other is a home equity line of credit, or HELOC. The lending institution sets the interest rate, loan repayment terms, and other relevant conditions. Many banks, mortgage companies, and other money lenders offer HELs and HELOCs, so homeowners may benefit from shopping around online and on the street to find the best deal available.
Proceeds from a second-mortgage HEL are delivered in a lump sum and interest starts accruing immediately. With a HELOC, however, proceeds are available for withdrawing as needed. Interest accrues only on the amount of the HELOC that is used.
The interest rate applied to the HEL can be either fixed or variable. A fixed rate will remain constant throughout the period of the loan. But, a variable rate will fluctuate with variations in the lending institution's prime rate.
The term and conditions of an institution's credit agreement must fully disclose information you will need to make an informed financial decision about accepting the loan debt. Read the document carefully or have an attorney read and interpret it for you. For instance, you may be required to pay fees for one or more of the administrative and legal requirements associated with the loan.
The annual percentage rate, or APR, of a HELOC credit card as well as the repayment terms should be manageable within your budget.
It is important to remember that the market value of the property used as collateral needs to be sufficient to sell the property in order to repay the loan, if necessary.
After choosing a lending institution, you'll fill out a loan application. The institution will appraise the property and, if approvable, will typically loan up to 80% of the current market value.
If you opt for a second mortgage type of HEL, you will receive the entire loan amount to manage as you intend.
If you choose a HELOC, you receive a checkbook or credit card to withdraw money as needed for the term of the loan. The term of a HELOC typically runs 10-15 years, and the lender may renew the line of credit based on repayment history and other appropriate factors.
A second mortgage type of HEL allows you to use and manage the lump sum of money as intended. However, a HELOC provides the flexibility of using variable amounts of money as needed and having to pay interest only on the amount used.
A portion of the interest paid on either type of loan may be tax-deductible in accordance with prevailing IRS rules.
The main disadvantage of a home equity loan is that you risk losing your home and property if the loan is not repaid as agreed.