A home equity loan is when a person borrows money, using his home as collateral, so the creditor may then lay claim to the debtor’s residence in case of default. Such a loan is not used to purchase new property; it is instead secured by property already owned by the borrower. (Equity is defined as the difference between the value and the cost of one’s property.)
A homeowner may wish to apply for a home equity loan for a number of reasons. He may want to add a room to his house that will increase its value. He may need to pay for his child’s college expenses; or he may want to pay his credit card debt— though in this last case it is a bad idea if he does not have the discipline to use his card equitably. Likewise, if one intends to make a purchase or to travel, taking out a loan will only put the borrower into debt— a debt with no breaks from fees or interest that remains after the trip is over or the objects purchased have decreased in value or condition.
If the home is worth more than what is owed on it, a home equity loan can help pay for a new car. The interest on that loan then reduces one’s federal and state tax bills. The rate of interest is also usually lower with a home equity loan than it is with a conventional car loan— although the closing costs and finance fees are higher.
Another situation in which a home equity loan might prove profitable is when one has many high- interest debts, in order to help pay them off. The loan itself is paid off when the owner sells the house.
In typical cases, a home equity loan is a form of secondary mortgage— that is, the loan is subordinate to another loan on the same piece of property. But it can also be the primary mortgage if one’s home equity is greater than the amount of the mortgage.
To qualify for a home equity loan, one usually needs to have a good credit history. Applicable fees include those for appraisal, title, stamp duties, arrangement, early payoff, and closing expenses. There are others that may be waived, such as valuation fees.
Like any type of loan, this one has both its advantages and its disadvantages. Among the advantages are that the loan can be used for anything; the interests can be deduced, within limits, and the rates are competitive; funding can come in as little as two weeks; and there is a revolving line of credit. Disadvantages are that the home must be appraised to see if it qualifies; the owner must be occupying the house; and if one wants to sell and remove the loan, a penalty exists.
Once one has signed the loan, according to federal law, he has three business days to cancel the deal at no cost, for whatever reason. The cancellation must be in writing.
The Best Home Equity Loan