Home equity is how much you contributed for your home which is obviously debt and loan-free. It is your share of the value of your home. A home equity loan, on the other hand, is kid of a second mortgage, the first being the one you used to purchase your home. Home equity loans allow the owners of the house to borrow money by leveraging the equity in their homes.
Two varieties can be generally recognized in home equity loans namely "fixed-rate loan" and "line of credit". The terms for both the kinds usually range from 5 to 15 years and in either cases if the house of interest is sold, the loans must be fully repaid.
Home equity loans not only attract the lenders but are equally interesting for the borrowers holding benefits for both the groups. The most common advantage is the low interest rate or ARP as compared to those on credit cards and other consumer loans.. Also the interest loan can be tax deductible and borrowers can usually qualify for a comparatively larger loan with this kind of loan.
The authenticity or rather surety of these benefits is confirmed by the involvement of the band, which can take over your property in case of any unpaid funds. It sells you property and undoes the damage. As a result of this, these loans become a priority of the borrowers since they do not want their property to be sold out.
The lenders or let's say the banks also have to make sure that they do not lend such an high amount which becomes difficult to repair so they have fixed the loan to round about 85% of your house value keeping in consideration any home equity loan you have applied for and your original purchase mortgage.
Being an easy source of cash, the consumers find themselves at a great benefit initially. Most of the consumers consolidate their debts with home equity debts, getting a single payment, low interest rates and the even greater tax benefits.
For lenders, it can simply be explained as a dream come true aiding them to earn even greater fees and interest after earning it on the initial mortgage of the borrowers. If the borrower in any case, fails to return the loan, the lender gets to keep all the money earned on the home-equity loan as well as that earned on initial mortgage.
The advantages for the lender do not just end here. He can also repossess the property and repeat the same cycle with a new borrower, selling it all over again. In easier words, the lender can enjoy the benefits over and over gain from the same piece of property, which is one appealing opportunity.
Most of the borrowers fail to recognize the most frequent pitfall of the home equity loan. They find it an easier solution to escape from the already mounted up debts, failing to realize that they are actually sinking deeper into debt.
Lenders call this entire scenario "reloading" which is defined by them as a habit of paying of existing debts by taking another loan and freeing up additional credit which he then uses to make some additional purchases. To avoid these pitfalls of reloading it is always recommended to double check your financial status and situation before you opt for borrowing loan against your home. You must be fully aware of all the terms and be sure that you would find a means to pay it off at appropriate time.