In a home equity loan, your equity of the home serves as collateral. The amount of money you can borrow is closely connected with the value of your house. Thus the appraisal of your home is a necessary step in the process of a home equity loan. Usually it is the lending institution that sends an appraiser to value your house. A lien is put against the house as soon as the loan proceeds, so your equity of the house reduces. If you apply for a home equity loan, the lender will check your credit rating. It’s important for you to possess an excellent credit history, or you may lose the chance of getting a home equity loan, for the standard on credit score is quite high.
Before you decide to get a home equity loan, you need to learn about its different types. Only after you know about the differences, will you realize that which type fits you best.
There are two types of home equity loans: fixed-rate loans and lines of credit. They are regarded as second mortgages, because to some extent, the process of home equity loans is similar with that of traditional loans. They both request that the borrower must offer his real property as collateral. But they are different. First mortgages often have a longer life than home equity loans.
Here we are talking about home equity loans, so let’s figure out the differences between the two types.
Fixed-rate home equity loans
Fixed-rate home equity loans are closed end loans. From the traditional aspect, we just call them home-equity loans. In this type of loan, the interest rate and the payment remain the same during the whole term. And it is a one time lump-sum loan.
Home-equity lines of credit (HELOC)
On the other hand, a home-equity line of credit is an open end loan. The term implies that it works much like a credit card. Actually, in some cases, you borrow against the equity through a credit card. So you can get the money when you need it. Of course, there is a limit in the card. The interest rate is adjustable instead of fixed. Therefore, the payment is changing throughout the payment period. The minimum monthly payment can be as low as only the interest that is due. But when you reach the end of the term, you must make the full repayment as you do with fixed-rate home equity loans.