January 22, 2012

What You Should Know About Home Equity Loans

In these days of economic uncertainty and instability, with unemployment numbers rising and salaries decreasing, many people find themselves unable to cope with all their monthly expenses from one pay day to the next without the help of a loan. Also, it is common to apply for a loan to finance alterations or additions to one’s property. One way people have found to help them out in these trying times is to take out a Home Equity Loan on their existing property – but what exactly is a Home Equity Loan and how does it work?

In a nutshell, a Home Equity Loan is a type of loan whereby your existing mortgage lender will give you another loan added to your existing home loan. This means that you are, in fact, taking out a second mortgage on your property – thus this type of loan is also called a second mortgage.

Home Equity Loans are offered in two variations. One is that of a Fixed Rate Loan, just the same as a fixed rate mortgage; and the other type is called a Line of Credit Loan. Both these types of home loans are generally given for periods of between five and fifteen years.

At the outset, there are three very basic, but extremely important, aspects of this type of loan that you should be aware of. The first is that if you take out a Home Equity Loan, you cannot sell your property until it has been repaid. The second is that the lender will only give you another loan based on the amount you have already paid off on the original mortgage. The third is that the interest paid on a Home Equity Loan of up to £100,000 is tax deductable.
Bearing the above in mind, this article will explain the pluses and pitfalls of this type of loan. In the case of a Fixed Rate Loan, the lender will give you the loan in cash, to use as you require. As the name suggests, the interest rate is a fixed amount with no fluctuations, so you know exactly how much you will have to pay back each month.

Alternatively, the Line of Credit Loan is given with a varying interest rate. This is because this type of loan is used in a similar way to that of a credit card, meaning that you can withdraw amounts as and when you need the extra finance over a specified period of time (the term). This, in turn, means that each monthly payment will be a different amount, depending upon how much money you have withdrawn during the month. It is to be noted that any amount outstanding at the end of the term has to be repaid in one lump sum.

Even though this type of loan can come in very handy when one is in a tight squeeze financially, it must be noted that the lender will come out with a very nice profit, as you will be paying interest on two loans at the same time and, in the unhappy event that you cannot repay the loan, the lending institution not only gets to keep all the money you have paid on both the initial mortgage and the Home Equity Loan, but your property may well be repossessed as well.
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