Home equity loans are loans in which the borrower’s home is used as collateral. The loans are often used for major expenses such as home renovations, college education, or medical expenses. The loan reduces the borrower’s equity in their house and is generally paid monthly like a mortgage payment.
There are two main types of home equity products, home equity loans and home equity lines of credit. A home equity loan is a one-time, lump sum loan given by the bank with a fixed rate of interest. It is similar to a fixed rate mortgage loan. A home equity line of credit is a revolving credit line which the borrower can draw down when needed. The lender sets the upper limit of the credit line depending on the equity available in the borrower’s house and the borrower’s credit history. For many banks, the limit of a home equity loan or line is the borrower’s equity in their house, minus any liens.
There are several advantages to using a home equity loan or line as a
financing tool. They include:
* Rates that are
usually lower than credit cards because the loan or line is secured
with collateral (the borrower’s house).
* Generally
no points, closing costs, and processing fees.
* Tax
deductible interest
* Home equity lines and loans borrow against the
equity in the house.
* In this way, they reduce
equity that a homeowner may have spent years in building.
*
The line and loan is collateralized by the borrower’s house.
*
If the borrower defaults on their loan, the bank can seize the
house.