Home equity is the difference between the market value of your residential property and the mortgage amount that you continue to owe. Home equity loans allow you to borrow additional money, using your residential property as collateral. It is not necessary for the home mortgage to have been paid off completely to obtain a home equity loan. In other words, home equity debt is a second mortgage. It allows you to turn the unencumbered value of your home into cash, which could then be spent on debt consolidation, home improvements or any other expenses. There are two kinds of home equity debt. The first kind is called a home equity loan and the other kind is called home equity lines of credit, or HELOCs. In a home equity loan, you receive a one-time lump sum that is to be paid off over a specific amount of time. The rate and the monthly installment amount remains the same until the end of the term. Once the money for a home equity loan has been received, you cannot borrow any further amount using your home as collateral. Home equity lines of credit works more like a credit card. You are assigned a loan limit based on your home equity for a period of time that is set by the lender. During this period, you can withdraw funds as per your requirement anytime, within the overall loan limit assigned to you. You can choose to repay the principal with interest or the interest alone. If you repay the entire principal or part of the principal, you can use the credit again, just like a credit card. The interest rate on home equity lines of credit is a variable that fluctuates through the loan period. A typical home equity line of credit is split into the draw period and the repayment period. During the draw period you can draw credit and the monthly payments can cover only the minimum interest costs, if you so desire. During the repayment period, you are not allowed to draw further credit and your monthly payments must include repayment of the principal along with the interest. Interest rates on home equity loans and home equity lines of credit are pegged a little higher than normal mortgage rates. The repayment period for home equity loans and HELOCs is usually shorter than the original mortgage, with a typical repayment period being 15 years. |
