What Does a Home Equity Loan Consist Of

What does a home equity loan consist of? A home equity loan utilizes the equity in your home as collateral to secure the loan, usually at a substantially lower interest rate than an unsecured loan.

Learn about the different types of home loans.

There are two different types of home equity loans:

• Home Equity Line of Credit: This is a revolving line of credit that is connected to the equity in your home. The amount of funds you have available to you will usually not exceed the amount of equity you have in your home. Equity refers to the amount of money your home is worth, minus the amount of money you owe on the home. You can draw from the line of credit as needed and will make a monthly payment that is based on the amount you owe. You can continually use the equity line of credit similarly to how you use a credit card account.
• Home Equity Loan: This is an installment loan that is secured by the equity in your home as collateral. Payments are usually a set amount each month, and unlike the equity line of credit, when the loan is paid off, the account is closed. This type of home equity loan is appropriate for homeowners who need a specific amount of money as opposed to an open line of credit.

There are other loans that are similar to equity loans, or are equity loans disguised as creative mortgage financing. If a loan is secured by the equity in your home, and is not a primary mortgage, then it is indeed considered an equity loan.

Lenders are able to offer lower interest rates with home equity loans because the loans have homes as collateral. This means that obtaining a home equity loan is the same as taking out another mortgage on your home –this is why home equity loans are often referred to as second mortgages- and whatever lender you borrow the money from becomes an additional lien holder on your home.

In other words, the lender who gives you an equity loan has the ability to take possession of your home in the event that you do not make timely payments. This is not as common as a foreclosure from a primary mortgage lender, but the possibility exists nonetheless. For this reason, many financial experts caution against using equity loans unless necessary. On the flip side of that idea is the argument that equity loans should be used whenever possible because of the lower interest rates and the potential for tax deductibility.

The interest you pay for an equity loan may be tax deductible. Several factors influence whether or not you can claim interest paid on a mortgage or equity loan as a deduction on your taxes, so the best source to find out if you qualify for this deduction is a competent tax advisor.

A home equity loan is similar to other loans in the sense that it is comprised of two major elements:

• Principal Balance: The principal balance is the actual amount of money you owe. If you obtain a home equity loan in the amount of $10,000, before you make your first payment your principal balance is still $10,000.
• Interest: Interest is the amount of money charged by the lender for you to have the home equity loan. When you make a payment, a portion of your payment goes to principal and the remainder goes to interest charges. With most mortgage and equity loans, the interest is initially a larger portion of your payment than the principal.

Equity loans have the distinct advantage over primary mortgages of not having Private Mortgage Insurance (PMI) added. If you have questions about your home equity loan, or you are thinking of obtaining a home equity loan, speak to your preferred lender to find out more information.

• Rent to Own By Owner
• List of Popular Mortgage Companies
• FHA Loan Guidelines

• FHA Mortgages and Home Inspection Requirements
• Help for Single Moms to Buy a House
• Escrow
• FHA Debt to Income Guidelines
• Free Home Inspection Forms

• Category:Mortgage Loans
• Main Page