Home equity loan (HEL) is a loan secured against the equity of your home. In many cases, a home equity loan is a second mortgage that is secured against the owned value of your property. If the HEL is a second mortgage, then the loan does not have a priority over your property in case you ever become a defaulter. This is the reason why securing equity mortgage requires strong credit score and is usually available for a shorter period of time. The interest rate is also higher than that of your primary mortgage.

Home equity mortgage is secured against your house, which is probably the most valuable asset that you possess. This is why this loan is usually reserved for times when your funds are tight and your obligations are critical. It is usually not used for day to day expenses, luxury buys or recreational purpose.

It is mainly used for important reasons like repayment of critical debt, renovating the house or supporting your children in their education. It may also be used for medical emergencies if your medical insurance is insufficient. Equity mortgage or home equity loan is of two types, open and closed. The choice of one or the other depends on your financial situation and the loan offers.

Additional Charges

This type of loan may include other peripheral charges like appraisal fees, originating fees, title fees, stamp duties, arrangement fee, closing fee, pre-payment fee etc. You must understand all of these carefully before you actually borrow the money. Some of these can be negotiated with the lender to be waived off or decreased in amount.

Advantages

This kind of loan offers various advantages. Very often these are offered with lower interest rates compared to many other loans, especially the unsecured ones. Even the student loans sometimes have higher rate of interest than HEL. Under such circumstances, it is better to settle for such a loan and commit to making regular, planned repayments.

Another advantage of HEL is that the interest on this loan is often tax deductible. The interest that is charged on other loans like credit cards and personal loans does not offer this advantage.

Disadvantages

There are a few risks also involved with home equity loans. If you fail to clear this debt, the bank can head for a foreclosure or levy severe penalties. The rising rate of interest is yet another threat if the loan has a variable rate of interest. You must look for yearly a cap on interest rate on such a loan.

Besides, some of your HEL contract clauses like prepayment penalties may not be very favorable and can put you in a tight spot. Be on a lookout for such things to avoid getting a raw deal.

Equity mortgage is useful if you can avoid or manage the risks involved with it. Securing a house is a painstaking job. Letting it go out of your hand might be heart breaking, so be careful with important decisions like a home equity loan.

Author Bio: For more information on second mortgages or to talk to a mortgage broker in Canada, contact Canadian Mortgages Inc.

Category: Finances
Keywords: home equity loan, mortgage loan, HELOC