What Kinds of Home Equity Loans Exist?

Home equity loans, also called second mortgages, provide you credit with your home as security. The equity on your home is what you owe on it and the difference between the market value of your home. The more equity you have, the more you can borrow. The main advantage of home equity loans is that interest rates are rather non and low. The problem with home equity loans is that they put your home at risk. If you can’t cover the loan, then you may need to market your home to repay the lender.

Lump-Sum Equity Loans

Lump-sum equity loans are much like primary mortgages. You borrow a lump sum of money, use property as security and repay the loan to the lender at either a variable or fixed-rate of interest. With fixed-rate loans that the interest rate stays the same throughout the loan, and you know just what your payments will be monthly. Variable-interest rates are usually reduced, but might increase or drop throughout the life of the loan. A good way to compare the cost of home equity loans is to look at that the annual percentage rate (APR), which, as in a mortgage, unites in a yearly rate the initial interest rate and closing fees.

Home Equity Lines of Credit (HELOC)

Home equity lines of credit, or HELOCs, operate similarly to credit cards. Your lender pre-approves you for a spending limit. You can draw when and what you would like on your HELOC until you reach your limit. HELOCs have a set duration. Once you reach the end of the term, the loan must be repaid in full. Interest rates are variable, also such as credit cards, so your monthly payments depend on how much you borrow and the going rate of interest.

Reverse Mortgages

Reverse mortgages are a special type of home equity loan only available to senior citizens 62 and over. You can pick between borrowing a lump sum or getting monthly amounts, like a retirement, either briefly or until you die or sell the house. The difference between reverse mortgages and other home equity loans is that you don't cover the mortgage back until you die or sell the home. They’re more expensive than other loans, so you might need to research different procedures of raising money before resorting to a reverse mortgage.

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