Home Equity Loans or HEL is a type of Loan in which one uses the home equity as collateral. As these loans are secured against the value of the property, so they are called second mortgages. It is a one time Lump-sum loan and often with fixed monthly Installments. It is possible to borrow up to 100% of the value of a home. The loan to value also influences the decision of the creditor. Some creditors might be comfortable to finance up to 80% while others might go up to 125%.
Home Equity Loans are secured loans as the debt is secured against the mortgaged property. In case the borrower defaults, the creditor may take the possession of the property and also sell it to settle the debts.
Borrower should be quite sure of his ability to pay off monthly Installments; else one might end up loosing his home. Home Equity loans can be of two types i.e.
Another quite similar type of loan is Home Equity Line of Credit (HELCO), but it differs from HEL because the former is a revolving credit line which against which refinancing is available at any time, mostly up to 125%. . It can be helpful if the one is not sure of how much money he or she will need in the future.
HEL can be a good source for debt consolidation if one is planning to pay off credit cards, it could be a way out as interest rate is quite low that the borrower has to pay while credit cards generally have higher interest rates. But if this is the only requirement then he should have a good home work of its strength of paying off the loan before having the loan issued as the he would be in a fix if he starts defaulting, it would leave him in a bad position.
Nevertheless, Equity in your home is one of the best resources ever because lenders consider it almost to be risk free. One of the most important features that one can enjoy is tax-rebate over the interest portion of loan. Home Equity Loan is a good way of getting debts out of your lives as lower interest rates give a good chance to give all your credit cards away.
