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Home Equity Loans
Home Equity Loans
A Home Equity Loan (HEL)is available to those who have established equity in their home (their home is worth more than they owe on it). The proceeds from a Home Equity Loan can usually be used for whatever the borrower needs it for. A best practice is to reinvest a Home Equity Loan in another property, business, or something else that has some type of appreciation or expected return. Often, however, homeowners use the proceeds of their Home Equity Loan to make large luxury purchases like boats, vacations or cars. There are two basic types of Home Equity Loan: closed ended and open ended.
The first type of Home Equity Loan, the closed ended, allows the borrower to receive a lump sum of money. A closed eneded Home Equity Loan is a second position loan. This means that the original mortgage has first rights on collected money in the event of a foreclosure. Usually, these mortgages are payed back at a fixed interest rate over a period of fifteen years.
The second type is an opend ended Home Equity Loan, also known as a Home Equity Line of Credit (HELOC). A Home Equity Line of Credit is an account that allows a borrower to withdraw funds based on the amount of equity in their home. It is recommended that a borrower open a Home Equity Line of Credit when they don't need it so they can negotiate favorable terms and already have the line of credit open when they do need it. Home Equity Lines of Credit tend to carry adjustable interest rates and may have interest only repayment options. Unlike a normal Home Equity Loan, which pays a large sum upfront, a Home Equity Line of Credit is an account that stays open and the borrower can withdraw whatever amount they desire (that is available) whenever they want it.