Once you have built up equity in your home, you have the privilege of applying
for a home equity line of credit, which allows you to borrow the money you need.
Most financial institutions ( banks, savings and loans ) have entered the home
equity market, so you have plenty of options when you shop for the best loan.
In effect, a home equity loan is a second mortgage on your home. You usually get
a line of credit up to 70 percent or 80 percent of the appraised value of your
home, minus whatever you still owe on your first mortgage.
For
example, if your home is worth $100,000 and you owe $20,000 on your mortgage,
you might receive a home equity line of credit for $60,000 because your lender
would subtract your $20,000 owed on the first mortgage from your $80,000 worth
of equity.
You will qualify for a loan not only on the value of your home but also on your
creditworthiness. For instance you must prove that you have a regular source of
income to repay a home equity loan.
The difference between the two kind of credits is easy: the home equity loan has
a fixed rate and the home equity line of credit has a rate that fluctuate and
it's better indicate to consolidate other debts than the credit cards.The home
equity line of credit is an " on demand" source of funds that you can access and
pay back as needed.
You only pay interest if you carry a balance because these line of credits are
essentially a revolving line of credit, like a credit card but with a much lower
rate because the line of credit is secured by your home.
Like other mortgages, the home equity loan requires you to go through an
elaborate process to qualify for an open line of credit. You will usually need a
home appraisal and must pay legal and application fees and closing costs.
Because a home equity loan is backed by your home as collateral, it is
considered more secure by lenders than unsecured debt, such as credit card debt.
Further, because the loans are less risky for banks, you benefit by paying a
much lower interest rate than you would on credit cards or most other kinds of
loans.
Home equity loans can therefore offer extremely attractive
rates when the prime interest rate is low, but subject you to much higher
interest costs if the prime shoots up.
You can tap the credit line simply by writing a check, and you can pay back the
loan as quickly or as slowly as you like, as long as you meet the minimum
payment each month.
