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Home Equity Loan

Mar 16, 2008
Knowing the terminology is an important step to good decision-making. The term 'Equity' is an important financial term for the homeowner. Some do not realize that their mortgage lender does not own their entire home. Equity describes your ownership in that portion of your home that has no mortgage, loan or lien upon it. It belongs to you free and clear. This home equity is available for you to You could use your home equity ownership to finance other obligations in the future. This financing is referred to as a home equity loan.

When you decide to get a loan using this equity in your home as collateral, then you would apply to a mortgage lender for a home equity loan or a line of credit. There is a difference between these two products, although both are based on the amount of home equity available for you to finance.

The home equity loans are dispensed in full to the borrower at the closing. Usually, if another home equity loan needs to be paid off, the lender will do that before cutting a check to the borrower. In the event that the funds are being used for debt consolidation or reconfiguration, the lender may make the payments to the different creditors upon request. The borrower always has the option to request some cash out and the excess funds are then given to the borrower.

Of course, there are advantages to be considered when applying for home equity loans. The biggest advantage is the fixed rate for the length of the loan. Home equity loans normally have slightly higher rates than a home mortgage and a shorter repayment time. If your home equity loan provided cash-out funds, you might consider investing that money let it earn some interest. This is especially prudent if the money is not needed immediately.

The line of credit is still based on the amount of equity, but the dispensing of funds and the recipients of those payments are determined by the homeowner. This type of home equity loan works like a credit card and is used similar to a checking account. There are two added advantages to requesting a line of credit as opposed to the home equity loan.

One advantage is that the monthly payments are based only upon the principal amount that has been used, rather than the amount of the loan. As the monthly payments are made, part of the amount paid goes back toward principal. The second advantage is that this 'recycled' amount can be used for other expenses.

There is a major disadvantage to the line of credit. Each month the amount due will change. The interest rate is also adjustable and this, along with the amount of the principal balance used, accounts for the fluctuation in payments. The homeowner's budgeting allotments are compromised as a result of the variation in the monthly repayment amounts. In the long-term, this could prove to be troublesome. Your financial circumstances will determine if this type of home equity loan is the right one for you.

As you can see, the home equity loan and the home equity line of credit each have their own desirable features as well as their own drawbacks. It is wise to take "due diligence" seriously and research, calculate, project and decide which one best fills your needs. Either one is a good example of "sending your home to work - for you."
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