Your home might probably be considered as one of your most prized possessions. It does not only provide a roof over your head but also gives you a sense of ownership. Other than that, your home may be put up as collateral should you ever be in need of a certain amount of money whether it is to remodel the very same home or for any other reason. When you use the part of your home that you actually own as collateral to apply for a loan, it is called a home equity loan. Basically if the current value of your home is $200,000.00 and your mortgage is $150,000.00, your home equity is $50,000.00. It is this $50,000.00 that will serve as guarantee. Should you default on the payments of your home equity loan, your creditor can obtain legal rights to seize your property.

This particular type of loan is also considered as a second mortgage due to the fact the home was previously bought with a regular home loan. You may opt for home equity loans for various purposes such as:

– Home remodeling
– College education
– Debt consolidation
– Business investments
– Major purchases
– Living expenses

Although there are circumstances when it might not be recommended for you to choose home equity loans as your source of funds, you do have the option of making your own choice provided you are aware of the consequences; the biggest of which is that you might lose your home if you continuously fail to make payments to your creditor or lender.

Home equity loans are not to be confused with home equity lines of credit (HELOC). Essentially, both types of loans are similar with the home being put up as collateral. However, with HELOC you will not be getting the money in one lump sum. Instead, you will be provided with something similar to a credit card or a checkbook that you may use as and when you need the funds. Some HELOC program specify a minimum amount of money you can withdraw every time while some may require you to take an initial advance once the loan has been approved. HELOC can also be taken up to obtain funds for home remodeling, major purchases or college education. Similar to home equity loans, HELOC may not necessarily be the best solution for everyone. Serious considerations must be taken when deciding whether to take up home equity loans or HELOC.

Both loans have their pros and cons. While HELOC might be recommended for people who need to make continuous payments over a certain period of time, home equity loans might be more suitable for those who are in immediate need for a large amount of money at one specific time. In terms of interest rates, both types of loans may offer considerably lower interest rates than unsecured loans due to the fact that your home will serve as security in case you should default on the payments. The interest might also be tax deductible depending on the state where you reside. The drawback is that if you continuously fail to make payments, your creditor will most probably exercise their legal rights to repossess your home.

Once you have familiarized yourself with the similarities and differences of home equity loans and HELOC, you might be able to choose which of the two best suit your particular purpose. Once you have decided you may go ahead and find the best institution to offer you the type of loan you wish to take. You may even apply for HELOC and home equity loans online because many reputable institutions have set up web portals to enable you to access their information even from your own home.

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Category: Finances
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