There is certainly no shortage of home equity loan companies on the market today You only need to turn on your TV to understand what I mean. Every bank, credit union, and financial institution offers home equity loans to their customers. That's great, buy how do you find the best home equity loan rates that are the best for you and your situation

Evolution of home equity

Home equity or line of credit is a loan where by mortgaging your house or keeping the same as collateral, you can borrow money. Collateral means you provide your own house as a security for the money that you borrow to the lender. The lender has the option in this case to confiscate your home if you do not pay the loan amount as agreed. Equity is the difference between the value of your house and the value of the loan that you have taken.

For example, say you have identified a property worth 200,000 $ and you have made the down payment of 20,000 $ and taken the loan for the balance amount of 180,000. Suppose say after five years the value of your property becomes 350,000, and if you have repaid 20,000 $ as repayment, then your home equity will work out to 190,000 i. e (350,000 160,000).

Thus a home equity loan is the amount that you can borrow by creating a second mortgage on you home, in the given case you can borrow upto 190,000$ which is the equity available against your home, by mortgaging the home and you can use the same for house improvements, college education or any other expenses.

There are two types of home equity, one is the home equity loan and other is home equity lines of credit. These types of loans are also called as second

mortgages as you are taking this loan by mortgaging your home for the second time. These loans are generally repaid over a shorter period of time say five years as compared to the first mortgage where the repayment period is longer say around 20 to 30 years.

home equity loan is where you get a lump sum amount of money from the lender, generally a bank or a financial institution, and the repayment amount is fixed over the period of the loan with a fixed interest. It should be noted here that once the amount is borrowed you can borrow further amount.

Home line credit works more on the concept of credit card, i. e there is revolving credit given to the borrower for a particular period of time and as and when the repayment is made, the amount of credit comes back to the original amount. For example, if the amount of credit sanctioned is 100,000$ and you borrow 50,000$ at a time and repay say 20,000$ within a year, then after you repay 20,000$, the credit available becomes 70,000$.

How to use Home Equity

Let us now discuss as how to use the home equity concept so as derive the maximum benefits. Considering the fact that home equity has tax benefits and also it has low interest payments, these loans looks attractive. People borrow money for various reasons but the most common being for home improvement, consolidate the debt position, for paying tution fees, medical expenses etc.

Home improvement: The home equity loan can be used to improve the interior / exterior of the home so as to make it more valuable. The point to be noted here is take the loan first, make improvements in the home and then if you are planning to sell the home, advertise for the same. If you put up the sale board first, then it would be very difficult to get the lender.

Debt Consolidation: With the optimum usage of credit cards, a lot people pile up debt on the credit card where the interest rates are at least 10 percentage points higher than the equity loan rate. Thus by using the home equity option one can reduce the interest burden and also take tax benefits on the repayment of equity home loan.

Miscellaneous: The home equity loan can also be used for paying tuition bills, medical bills, costs on vacation etc, especially for people with high income, who do not qualify for grants or do not get student loans.

Benefits and disadvantages of Home Equity Loans

First let us look at the benefits of home equity loans

?#8364;?It is easy to apply, i. e it is as simple as filling up a simple form with all the relevant details of self.

?#8364;?Similarly if your credit history is good andyou can prove that you earn sufficient enough to repay the loan, then your job is done. Also considering the fact that the home is mortgaged, the chances of getting a home equity loan is almost 100 percent.

?#8364;?There are lot of tax benefits available on home equity.

?#8364;?Refinancing of the existing loan can be done, when the interest rates fall to a great extent.

Now let us look at some of the disadvantages of home equity loans:

?#8364;?The nature of the home equity loan, especially when taken for financing tuition fees, medical expenses, repaying credit card debt etc, will inculcate a source of reckless spending on the person who has taken the loan, as easy cash is available to him.

?#8364;?The line of credit also encourages reckless spending as the credit keeps on increasing once the repayment is made. This doesnt help the person in saving any money, as he know he can spend up to the loan limit and once he repays it, he can again use the credit.

?#8364;?Due to competition in the market and also due to aggressive lending, sometimes the lender will encourage the borrower to show higher income in the application and provide a higher loan amount. But care should be taken is such circumstances that the lender may actually be interested in the property itself and once the borrower is unable to pay the monthly installments, he may take over the loan and stripping the borrower with his property.

?#8364;?Similarly at times, the lender will be asking the borrower to successively refinance his loan. One should be careful in such a case as there are costs involved in each refinance and the lender will be actually encouraging for refinance so that he can earn his fees.

?#8364;?Another disadvantage of not only equity home loan, but any loan product, is a lot of information is in fine print and the lender will always try to push up all the information so that the borrower doesnt notice it. Therefore it is always better to read the loan application form accurately to avoid any unnecessary costs such as insurance cost, prepayment penalty cost, administration costs etc.

Conclusion

To conclude we can say that home equity loan is a very good product available today in the market which enables people to make improvements in their homes at a affordable price and fulfill their dreams. Also in case of unforeseen cash crunch, one can use the home equity loan to pay tuition fees, medical fees, credit card balances etc. Finally if one uses the home equity loan sensibly, he can use his home for debt consolidation / refinancing which will save interest costs, but at the same time helps in creating tangible assets.