Home Equity Loans
Home Equity Loan is one of the most common type of loans in the United
States of America, but they cannot be obtained in any of the 50 States.
Home equity corresponds to the difference between the appraised value
and the mortgage value. A home equity loan (aka HEL) occurs when a homeowner
uses his home as collateral, generating a lien.
Usually home equity loans have a lower interest rate because the existence
of a building is already a warrantee itself. Another advantage is that
payments on a home equity can be tax deductible (up to 100.000 $). Home
equity loans can be “closed end” or “open end”: both can have pros and
cons, depending on the case.
The first one allows the borrower to receive one lump sum payment and
then the left over money once the processing fees are committed. These
loans are often thought of as second mortgages. Interest rates are usually
fixed.
One great pro of a closed end loan is that the borrower knows from the
beginning the final payment date but you have to keep in mind that the
closing cost of the loan can be considerable.
An open ended loan is substantially similar to a credit card: the borrower
can use HELOC (Home Equity Line of Credit) checks or a HELOC withdrawal
card within a predetermined credit limit. Usually the time limit to
access the credit line is included between 5 and 20 years, more often
the loan is written for 15 years.
The first evident great advantage of this kind of loan is the flexibility
and ease of use. Anyway those kinds of loans should be always considered
with extreme caution because they do have some risks, first of all the
risk of losing your home if the payment schedule is not punctually fulfilled.
Even a delay of 60 or 90 days in the payment can allow the lender to
foreclose the house. Home is the most valuable asset so it is advisable
to check every formal requirement: be warned of high-pressure sales
or of the impossibility to put the clauses and conditions in writing.
An insurance to cover payment in case of hazards can also be considered.
