Home equity loans are ideal for obtaining quick cash for debt consolidation, home improvements, etc. Homeowners can acquire loan approvals much quicker than non-homeowners. Because of rising home values, many homes have gained a significant amount of equity. Hence, homeowners are able to tap into this equity and access extra funds.
What are Home Equity Loans?
Home equity loans are similar to other types of loans offered by banks, credit unions, and other financial institutions. The only difference is that a home equity loan uses your property as collateral. Furthermore, equity loans are primarily based on the amount of equity your home has acquired.
For example, if the original mortgage amount was $200,000, and the amount owed to the mortgage company is $130,000, the home has acquired $70,000 in equity. Thus, homeowners may obtain a home equity loan up to this amount. The money can be used for any purpose such as building a cash savings, paying off debt, or establishing a college fund.
Different Types of Home Equity Loans
Homeowners may select one of two different types of home equity loans. One type of home equity loan is a second mortgage. When homeowners obtain a second mortgage, they receive a lump sum of money from the lender. In turn, the property gains a second lien.
Similar to first mortgages, homeowners are obligated to make monthly payments to the holder of the second lien. Because second mortgages are generally smaller than the initial mortgage, payments are considerably less.
Homeowners also have the option of applying for a home equity line of credit. This type of home equity loan offers flexibility. Instead of receiving a one-time lump sum, homeowners gain access to an open line of credit. For an average length of ten years, homeowners may withdraw funds as needed. Unlike second mortgages, lines of credit do not have fixed monthly payments. Rather, payments are based on the amounts withdrawn from the account.
Choosing the Right Home Equity Option
Deciding between a second mortgage and a home equity line of credit may be difficult. However, homeowners must access their personal needs. Second mortgages are more fitting for persons who need immediate cash for a one-time purchase, whereas lines of credit are more suitable for homeowners who require smaller cash amounts over an extended period.