Home Equity Loan
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Home equity is the difference between the value of your home and the mortgage. Home equity permits a person to borrow extra money by using his/her residential property as collateral. It is not obligatory to paid off home mortgage in full for getting a home equity loan.
Home equity debt is a second mortgage, which lets you to turn the unencumbered worth of your home into cash and in turn, it could be used to consolidate your debts, for making home improvements, or any other expenses.
The two main types of home equity debts are home equity loan and home equity lines of credit or HELOCs. In a home equity loan, you receive a lump-sum amount that is to be paid back within a specific period of time. The rate of interest and the amount of installment remains the same till the loan is fully paid. After receiving money against a home equity loan, you cannot borrow any additional amount using your home as security.
On the other hand, home equity lines of credit acts as a credit card. The lender assigned a certain loan limit, which is based on your home equity for a specific period of time. You can withdraw funds but according to the overall loan limit. You have to pay interest, which may fluctuate through the loan period.
Usually, a home equity line of credit is divided into two categories: draw period and the repayment period. You can draw credit during the draw period and the monthly payments can cover minimum interest rates. During the repayment period, you cannot withdraw and your monthly payments must include repayment of the principal along with the interest.
The lenders charge high interest rates on home equity loans and home equity lines of credit. The repayment period for such loans is normally shorter than the original mortgage.