| What Is Home Equity Loan? |
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The word equity simply means how much the house is worth minus the mortgage you
currently owe.
There are two types of equity loan
1) Home Equity
Loan
A home equity loan is a one off lump sum of money when you take up
a loan. Usually, the loan period is between 5 to 30 years and the interest rates
are fixed. The payment amount per month is fixed as well.
2) Home Equity
Line Of Credit
A home equity line of credit allows you to borrow a fixed
amount of money for the life of the loan. You do not need to take a lump sum
loan at once since you can withdraw any amount of the loan when you need it. In
a sense, it works like a credit card.
The interest rate for a home
equity line of credit is variable and will rise and fall during the loan period.
Payment per month depends on the total sum loaned, the interest rate and whether
your credit is in the payment or draw period.
During equity draw period, you
can decide whether to pay the principal loan amount or the minimum payments to
cover the interest.
For equity line of credit, the loan period is
usually shorter than home equity loan. Usually, it is between 5 to 15 years.
During this loan period, you will not be able to increase the loan or repay the
balance left in the loan. Do note, there is usually a minimum amount whether you
decide to withdraw some money from the loan.
As you see, an equity loan
line of credit has greater flexibility compared to home equity loan. However in
both cases, if you decide to sell the house before the loan is fully paid, you
are required to pay the balance immediately. |
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