Home equity loans are a way of using the money that you've invested in your
mortgage by borrowing against it. Essentially, a home equity loan is a 'second
mortgage' - a loan secured by your property. If you don't make good on your
payments, the lending company or bank can force the sale of your house to
recover their money.
There are two major types of home equity loans - home equity loans and home
equity lines of credit, also called HELOCs. Most lenders that offer home equity
loans offer both kinds. A home equity loan for $10,000 and a home equity line of
credit for $10,000 are two completely different animals though they have a lot
of similar features.
Home Equity Loan
If you apply for and are granted a home equity loan for $10,000 at 7% APR for
15 years, you will receive a check or a deposit to your bank account of $10,000.
That is the full amount of the loan that you can ever draw on that particular
application. Depending on the terms agreed upon, you may have one to several
months before you have to begin repaying the loan. You'll pay a fixed amount
every month until the full amount of the loan and the interest charge is paid
off. You'll know from the very start how much you'll be repaying.
Home Equity Line of Credit
A home equity line of credit - a HELOC - is much more like a credit card.
When you apply for and are granted a home equity line of credit, the bank
establishes a 'line of credit' - which functions just the way that a 'credit
limit' does on your credit card. You may receive special checks or a plastic
card with which to access your line of credit - but you don't receive the full
amount at one time.
In fact, you don't have to take any of it immediately. You can draw on the
line of credit at any time, up to the full amount of the line of credit
throughout the agreed-upon life of the loan. Suppose that you're doing some home
repairs. You can use your home equity line of credit to pay for $2,000 worth of
roofing tiles. That leaves you $8,000 in your line of credit. Three weeks later,
you can use your line of credit to pay for $4,500 worth of windows - and still
have $3,500 left that you can borrow against.
If you then start paying back on your home equity line of credit, that money
becomes available to you again. If you pay back $1,000 of what you've borrowed,
you now have $4,500 on your line of credit.
A home equity line of credit has two 'phases' - there is the draw period,
during which time you can draw against the credit limit as long as you stay
below the limit. During that time, you can elect to only pay the interest that
accrues - or you can make payments on the principal to free it up. Once the draw
period is over, you go into the repayment period. During the repayment period,
you can't draw against the line of credit any longer, and must make full
repayment.
About the Author
Joseph Kenny is the webmaster of
the loan information site http://www.selectloans.co.uk/
