What are the types of home equity loans ?

Home Equity Loans
Equity is the difference between your home's value and the balance on your mortgage loan. If your home is worth $100,000 and you owe $75,000 on the mortgage, then you have $25,000 of equity in your home.

Borrowing against this equity is currently a very popular method of getting a big chunk of credit, primarily because of low interest rates. Add to that the fact that the interest on most home equity loans is tax deductible and they become an appealing option if you need to make a major purchase.

Home equity loans are typically used for consolidating consumer debt or covering a large expense such as a big wedding, college tuition, or home renovations.

However, because your home is collateral for the loan, you should be very careful about using home equity loans. The problem is that if you default on the loan, the bank will foreclose on your home.

Types of Home Equity Loans
There are two types of home equity loans. A traditional home equity loan is also called a second mortgage and is when a bank lends you a lump sum of money that must then be paid back over time. With this type of home equity loan, interest begins building as soon as the bank issues you the money.

A newer type is a home equity line of credit, where a bank gives you a checkbook or credit card to make purchases, which then accrue against your home's equity. With this type of home equity loan, interest does not begin building until you actually make a purchase.

There are also several ways to repay a home equity loan. The most common option is to make regular payments toward both the interest and the principal.

However, some loans also give you the option of only paying the interest at the beginning of the loan and gradually paying more of the principal.

Finally, you may have the choice to pay both principal and interest, but to make extra payments in order to pay off the principal sooner. You should check with your lender about this, as some loans have penalties for paying ahead.

When you take out a home equity loan, the rate is usually higher than a regular (also called a first) mortgage.

However, the rate is generally much lower than the APR for credit cards, and it is repaid over fifteen years instead of four, meaning your payments will be lower than your minimum credit card payments.

For example, $10,000 in credit card debt at 15% will have a monthly payment of $278. The same amount owed at 15% on a home-equity loan over 15 years gives you a monthly payment of only $140.

The problem is that many people get a home equity loan to pay off their credit card debts, but don't change their spending habits and end up running up their credit cards again, compounding the problem.

Lenders call this "reloading" and if you lose a job, have a major illness, or the economy slows, you could lose your home.



Finding a Home Equity Loan
If you decide to apply for a home equity loan, you shouldn't necessarily automatically go with the same bank that holds your first mortgage. Instead, shop around to find the best rates and loan terms. Most home equity loans come with variable interest rates, although some come with low introductory rates, and a few have fixed interest rates.

You may also find loans with large one-time upfront fees, closing costs, or other annual fees.

Finally, there are loans with large balloon payments at the end, and others with no balloons but with higher monthly payments.

Finding the right loan for you is a challenge; it requires checking different lenders and comparing options to select the home equity loan that best meets your needs!