Home equity can be explained as the difference between the fair market value of the home and the unpaid balance of the mortgage and any other outstanding debt acquired on the home. Equity on a home increases with as the mortgage is paid off or when the property value in the real estate market increases by a fair percentage. There are different ways of utilizing this equity in an appropriate manner.
Home-equity loans: Also termed as second mortgage loans, home-equity loans are a popular option amongst homeowners who want to finance a major home renovation, pay down their credit card debt or take a once-in-a-lifetime vacation to any picturesque destination. In this type of loan, the equity on the home is used as collateral. Depending on the equity value, the loan amount is determined. The amount is paid to the customer as a lump sum. A home equity loan is a fixed interest mortgage loan that comes at a higher interest rate than that of first mortgage. It is important to have a good credit rating and a considerable equity of at least 10 percent on the home so as to become qualified for a home equity loan.
Home equity line of credit (HELOC): Also referred to as an open end home equity loan, HELOC works in a similar way to a credit card. The borrower can borrow against the equity in the property a multiple times, depending on his needs and requirements up to a certain limit. This limit on the borrower's line of credit is determined based on the equity on the property. Interest rates on HELOCs are variable. HELOCs have flexible repayment schedules and terms that are really convenient for many homeowners. As like credit cards, home owners can make regular monthly payments towards repayment of the credit. However, if these payments on HELOCs are missed, home owners can face the risk of losing their homes.
About Author: Pauline Go is an online leading expert in finance industry. She also offers top quality financial tips to investor like:
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