Home equity loans – when to go for them?

Home equity loans become attractive especially at a time when the interest rates are low. The equity held in the home is used as a collateral for these home equity loans. Equity is the difference between the home’s appraised fair market value and the outstanding mortgage balance on the home. Home equity loans make sense when one has high credit card debts or one has plans for home improvements. The two main reasons why people go in for home equity loans are – low interest rates and possible tax deduction.

Home equity loans can be of 2 types – term loans, also called closed end loans or home equity line of credit. Both of these are sometimes referred as second mortgage as the loan amount is secured by the property. First mortgages usually run for a longer period, typically 25 to 30 years. But home equity loans have a typical life of 5 to 15 years. Home equity loan or term loan is a one time lump sum that is paid off over an agreed upon time with a fixed interest rate and regular monthly payments. A home equity line of credit allows the owner to avail a line of credit up to a certain amount. During the life of the loan, if any repayments are made, the credit revolves and one can use the repaid principal again. Usually home equity lines of credit are offered with variable interest rates usually prime rate plus a fixed rate, for example prime plus 2%.

One has to clearly understand the consequences of non payment of loan amount, especially in the case of home equity loan or term loan. Any delay may attract penalties and might well end up in losing the property. Home equity loans are a sensible option if the financial problems are too many. Online help is available to home owners from various lenders.