A home equity loan is also called as second mortgage because it lets the homeowners to borrow money on the equity that is present in their house. In the recent times, these loans have gained popularity amongst the masses as it help the borrower to avail tax benefit for that year. This article would help you to get an insight to the benefits that these mortgages offer to the borrowers as well as to the lenders.
The types of mortgage
A borrower can avail the home equity loan in any of the two types- lines of credit and fixed rate loans. These loans can be availed for a time period of 5 to 15 years.
• Fixed rate loans
In this type, the borrower is provided with a single large payment, which is required to be paid back over the required time period. An additional benefit of this kind is that the payments as well as the rate of interest remain same throughout the loan tenure.
• Line of credits
Also known as the variable rate loan, line of credit works like a credit card. In this option the borrower is pre-approved for a certain limit and can thus withdraw the money according to his requirements via special checks or credit card. When the loan terms end, the outstanding loan amount is required to be paid back in full.
Home equity loans help the borrowers to have access to easy cash. Although the rate of interest on the home equity loan would be higher than your first mortgages, it would be lower than other consumer loans and other credit cards. Moreover the interest that is paid on this loan type is tax deductable and hence by consolidating their previous debts with the home equity loan, it can help the consumer to have a single monthly payment.
Home equity loans help the lenders to earn fees and other income on the initial mortgage. If in any case the borrower defaults on the payments, the lender can keep all the money that has been earned on the initial mortgage. In addition the lender can repossess the house and sell it again to start the cycle with a new borrower. This can help the borrower as well as the lender to earn great profits in the future.
Home equity loan is often seen as a valuable tool for responsible homeowners. If as a borrower, you have a reliable and steady income source, the low rate of interest and tax deductibility profits makes the equity loans a sensible alternative. Fixed rate loans would help you to conveniently pay the costs without getting any surprises in the future.
So when it comes to the home equity loans, talk to your lender or research the market well before opting for it. Read between the fine prints and make sure that you understand the terms and conditions of the mortgage before opting for one. Review your financial conditions and check with the financing institutes for your credit report as it can help you to avail loan at lower interest rates.
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