Home Equity Loans?
Just What Are They?

Learn What Home Equity Loans Are

While your house provides you with privacy and shelter its best feature may be the ability to get you out of debt. Houses are most likely your greatest asset and you can use this asset to take out a loan. Home equity loans are often used to pay off credit card debt, pay for an education, and buy a car or any other major expense that would require you to take out a home equity loan.

Not everyone is keen on the idea of taking out a home equity loan. Since you are borrowing against the value of your house your house must be used as collateral. Since your house is collateral for the loan you are basically taking out a second mortgage. It may seem risky to take out another mortgage on your house but in reality it can be a smart financial decision. Home equity loans usually come at a reasonably low interest rate which makes paying them back manageable. Since the interest rate is low you don't have to worry as much about it adding to your debt. The amount of a loan you can take out is the appraised value of your house minus how much of your mortgage you have left to pay on it. If you bought a house for $150,000 and have paid off $50,000 then that $50,000 is your equity. When you take out an equity loan your house will be appraised again. Since it is possible for your house to go up in value, it is possible to get a higher equity loan then you think. If your home was appraised at $180,000 you can add that extra $30,000 it increased to your equity, therefore leaving you with $80,000 in equity to take out a loan with.

There are two main types of home equity loans:

• Closed End Home Equity Loan- With a closed end home equity loan you get your payment in one lump sum up front and can do whatever you choose with it. Once you receive the initial payment you can not take out another equity loan until you pay it off. Closed end home equity loans are usually amortized for 15 years and have a fixed interest rate.
• Home Equity Line of Credit (HELOC)- An HELOC is more of an open ended home equity loan. You can borrow up to 100% of the value of your house and use it as a line of credit, borrowing against it whenever you want. As long as your total never exceeds your total equity you are golden. A HELOC can last 30 years but the interest rate is variable.