About Home Equity Loans

Home equity loans are available for homeowners or property owners. This is the kind of loan where the homeowner uses his property as collateral or a guarantee that the loan will be repaid. As such, it is a form of secured debt. If the borrower defaults on the loan, he loses his house and may be forced to move. The home equity loan is based on the amount of equity the owner has in the property. Equity refers to the amount of the principal that has been repaid on the mortgage, if there was a small down payment. It is the amount of value that is not mortgaged (appraised value of the home less the principal remaining of the mortgage). The greater the amount of equity the home owner has, the larger the amount of money he can borrow using the home as collateral.

There are advantages and disadvantages of home equity loans. First of all, it is usually a way of borrowing at a low interest and is available to any home owner with a good credit history. The lender looks at the debt-to-income ratio in determining eligibility. The big advantage for the borrower is that he can use the borrowed funds in any way he wants. He does not have to give a reason for borrowing or an account of how the borrowed funds are used. This is why home equity loans are so popular. In many instances, homeowners use home equity loans as a form of debt consolidation. Instead of having bills coming in at different times of the month with different due dates and different interest rates, they have one monthly payment at one interest rate. (The problem here is that they are turning short-term unsecured debt, like credit cards, into long-term secured debt.) Finally, depending on the borrower's situation, the interest on the home equity loan may be tax deductible.

The disadvantages of the home equity loan are that the size of the loan is limited by the amount of equity the homeowner has. For someone who is just beginning to repay their mortgage and has made the first few payments, they have very little, or no equity and cannot get a loan, unless they made a sizeable down payment on the house. The other drawback is the house is being used for collateral for the loan. If there is a default, the homeowner loses his house.

Home equity loans are attractive to the public because they are relatively easy for the homeowner to obtain. Since the home is used as collateral, the approval time for the loan is rather short, usually a few days and they don't have give a reason for wanting the loan. Home owners can obtain these loans in a variety of places. They can check with their own bank and other banks and lending companies. There are also many online lending companies and banks that provide home equity loans.


Author: Jill Kane