Equity Loans

A home equity loan is usually a line of credit such as £20,000 or £50,000 for which the borrower receives a checkbook and against which he or she can write checks. Usually home-equity loan payments have small interest-only payments for some period of time, and then they have a balloon payment that needs to be made. Home equity loans are sometimes revolving lines of credit that can be borrowed from, paid back and then borrowed on again.

Both second mortgages and home-equity loans are tax deductible, and they both represent liens on your property. Loan rates and terms vary a lot, so borrowers should shop around as much as possible. Some loans have no-closing-cost options, and many have rates linked to the prime rate. Borrowers should establish their objectives first and then shop for the loan. Loans with no closing costs usually have a higher interest rate, and loans are available with both fixed and adjustable rates.

Home equity loans and second mortgages usually have higher interest rates than first mortgages because they represent a greater risk to the lender.

It is safest to use a home-equity loan to make home improvements because this will increase the value of your property and not simply cut into it. These loans have allowed people to put their disposable debt into their homes, and people have chosen to use these loans to pay off consumer debt, take vacations and buy cars.

But people need to be aware that taking out a home-equity loan is removing value from their home. When they go to sell that home, if the loan has not been paid off, they may find they have very little equity left to pay for closing costs or to use as a down payment on another home.

Borrowers who want to fix up their homes to sell them should obtain a loan before they put their house on the market because banks usually won't give a home equity loan to someone who is about to sell his or her house.

Home equity loans can serve plenty of useful purposes, but people should be aware of the dangers of these loans, too.