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Home Equity Loans

The interest rates for home equity loans are currently lower than it was even during the 2008 financial/housing crisis. Hence it is a great reason to go for it now. There are already many homeowners who are reaping the benefits of such low rates of interest.

Home equity can be accessed by home owners in two main forms, i.e., as a HELOC/home equity line of credit, or as a home equity loan.

In case of a home equity loan, the homeowner gets a lump sum and has to repay that amount in fixed monthly payouts for the entire term of that new loan. People with equity in their house can exchange it for money by taking out a home equity loan. This money can be used by the homeowner as he/she pleases. It can be used to go on a vacation, pay for college education, pay for home improvement, or pay for medical emergencies, etc. In certain cases, the interest paid on home equity loans is tax deductible.

Equity on a house can be defined as the different between the house’s fair price in the market and the mortgage balance owed on the house. The home equity can be calculated by subtracting the remaining mortgage from the current value of the home. For example, if the fair market price of the house is $500,000 and the mortgage remaining on the house is $100,000, then the home equity is $400,000.

Home equity for several homeowners makes up a large part of their overall net worth. It is an asset that they are happy to leverage. Home equity loans permit the owners to get access to the home equity in the form of a lump amount of money, which can subsequently be used for numerous purposes. Such loans come with expenses that are similar to home mortgages, i.e., title search, application fee, attorney fees, appraisal, and points, etc.

A HELOC is a revolving ‘line of credit’ and thus serves as a credit card. Homeowners use it to make payments and interest is charged on the amount spent. HELOC’s do not come with additional fees and charges as is the case with home equity loans.

HELOCs generally come with a draw period, which is a fixed time period during which the funds can be accessed by the homeowner up to his/her maximum credit line. During this period, monthly payments of the interest as well as the principle have to be made by the HELOC borrower. After the draw period ends, the repayment period begins, and borrowers no longer have access to new funds. The repayments for the principle and interest continue till the remaining balance is completely repaid.

Homeowners who have built up considerable equity in their home can also go for a reverse mortgage loan. Reverse mortgages are available for homeowners who are 62 years old or more and desire an extra income source.

Cash-out refinance is another option that can be availed by homeowners. It helps replace the current home mortgage. The new cash-out refinance mortgage is for a bigger amount as compared to the existing mortgage. The money from the new loan is first used for full repayment of the existing mortgage. The remaining amount is then transferred to the homeowner. The new mortgage may come with different terms and different rate of interest as compared to the older home mortgage.