Home ownership is every American’s dream.
One takes a lot of pride in owning a home. It
is a one time investment and this pays off in
future. Various loans provide home equity mortgage.
Equity is the value of the homeowner’s
interest in the real estate. Equity is the amount
which is deduced after subtracting the total of
the unpaid mortgage balance and any outstanding
dues against the property from the property’s
fair market value. A homeowner’s equity
increases as he pays off his mortgage or as the
market rate of the property increases. When a
mortgage and a loan against the property are paid
in full, the homeowner ha s 100% equity in his
property.
A home equity mortgage loan is lump sum money
provided to the borrower. Loan is paid over a
set period on a pre decided rate of interest.
There are many reasons for which a borrower would
opt for a home equity mortgage loan. These include
a purchase of new car, consolidating debts, home
improvement, and small business expenses among
others. You can borrow up to 125% of your home
value.
The factors to be kept in mind while applying
for a home equity mortgage are lower monthly obligations,
possible tax deductions, lower interest rate v/s
credit cards, increase cash flow, fast money.
The home equity mortgage loans have some of the
lowest interest rates and minimum payments. The
reason is that the homeowner gives collateral
(home/property) as security against the loan.
Therefore the lender is at minimum risk. He knows
that even if the borrower is unable to pay the
loan, he has the property of equal value. So,
even if the borrower has a poor credit history,
it does not make much of a difference, as it is
a secured loan. Even the application and the documentation
requirements are less demanding. This makes it
easier to qualify for it.
The home equity loans are generally for a short
term than the first mortgages and known as the
second mortgages. There are two types of home
equity loans: term or closed end and lines of
credit. These are secured by the property and
therefore have lower monthly payments, lower rate
of interest and for a shorter term.
A closed end home equity loan is one in which
one time lump sum money is provided to the borrower,
which is in term paid off over a set period, with
a fixed rate of interest and equal payments each
month.
The other type of loan is lines of credit. It
works like a credit card. In this type of loan,
you are allowed to borrow up to a certain amount
over the life of the loan. The lender sets the
time limit. During the loan period, you can borrow
money as and when you need it. As the borrower
pays off the principal, the credit revolves and
you can use it again. It is more flexible than
the fixed term home equity loan. But the rate
of interest is variable and it fluctuates over
the period of the loan. The payment would defer
depending on the interest rate and the amount
of credit you have used.
When the life span of the loan expires, it must
be paid. It depends on the lender whether or not
to renew it. These days, equity is one of the
most valuable assets one can have.
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