Home Equity

A home equity loan is a second mortgage on your existing property. You can qualify for a home equity loan if you are a house owner. This loan will help you in refinancing your first mortgage.  This type of a loan is especially beneficial if you have taken a fixed rate mortgage and the current rate of interest is lower than what you are paying. The rate of interest generally changes over a period of time and if it goes down you stand to lose if you have taken a loan on a fixed rate of interest. So you can get rid of a fixed rate loan with a home equity loan and save some cash. This loan also helps you to meet other financial problems.

You have two options with a home equity loan; you can go for a line of credit or a second mortgage. It all depends on the kind of money you need and the way you want to spend it.

Line of credit
This is also called the HELOC or the home equity line of credit. A HELOC works similar to a credit card. There is a certain amount which is sanctioned and you can draw as much as you require within the set limit. Once you get approval for a certain amount, you can withdraw cash according to your needs and requirements. The advantage is that instead of paying interest on the entire amount that is sanctioned, you just need to pay it on the amount you have borrowed.

Second mortgage
You will get a lump sum amount of money with a fixed rate of interest in a second mortgage. You have to make repayments for a fixed period in installments. You can use the cash raised through second mortgage for a trip, education, home renovation etc. 

Advantages of home equity loans

• If you find yourself in financial mess every now and then, a home equity loan could be a good option for you. The interest charges on these loans might be higher than your first mortgage, but much lower than credit card or personal loan interest charges.
  
  
• You will be able to save money on monthly installments if you consolidate debts through home equity. You can reduce your mortgage burden by collecting this money to repay a part of your principal.
  
  
• Home equity loans are tax deductible.

There are many advantages of home loans but ultimately you must keep in mind that a loan is a loan that has to be paid back. In case you are unable to pay back the money, you can risk foreclosure. Study your financial requirements carefully and also keep in mind your present and future income status before you opt for this loan.