In layman's terms, a home equity loan is a loan secured by your home. A home equity loan may also be referred to as a mortgage or a second mortgage. Equity release schemes is another term for home equity loans.
When you take out a home equity loan, you are borrowing the value of your home. If you own the entire house, it is referred to as a "mortgage," whereas if you do not own the entire house but have equity, it is referred to as a "second mortgage." To facilitate better understanding, we will now use a single term for both. We'll refer to them as Home Equity Loans.
A home equity loan is a loan taken out against your home in addition to your mortgage; thus, it is referred to as a second mortgage. This allows a homeowner to cash out equity without having to refinance the first mortgage. The majority of people believe that selling their homes is the only way to raise funds. However, reality differs, and it is possible to take out a second mortgage to free up the first mortgage as well.
The equity in your home is the difference between the amount you owe on your current mortgage and the current market value of your home. Taking this definition a step further, suppose you sell your home; the amount of money left in your pocket after paying off the mortgage is referred to as equity. This equity, when borrowed from a lender without selling your home, is referred to as a home equity loan.
Many lenders or loan companies will let you borrow more money if you subtract the balances of your outstanding mortgages from 125 percent of the market value of your home. The actual equity, on the other hand, is the difference between the appraised value of your home and the balances of your outstanding mortgages.
There are no restrictions on how you can use the home equity loan. You are free to use it for whatever purpose you see fit. A home equity loan is typically a one-time fixed-interest loan that is paid off all at once.
The interest rate or cost of the loan will be determined by the options you select, such as the term and amount of the loan; of course, another important factor has always been your credit rating. The longer the loan term, the more interest you pay; likewise, the larger the loan amount, the more interest you pay.
Certain precautions should always be taken when taking on any liabilities. Before making a decision, thoroughly investigate all of your options. Choose the amount carefully, taking only what you need, and specify the term that you believe will be convenient for you to repay in. There's no point in accumulating liabilities in exchange for spending on frivolities or acquiring unnecessary assets.
People with poor or bad credit can easily obtain home equity loans because the lender is taking a lower risk because the loan is secured against their home.
A Home Equity Loan usually means you get the best interest rates on the loan, i.e. you get the loan at a lower cost compared to other loans because of the guaranteed security, but keep in mind that the house is at risk if you fail to repay the Home Equity Loan.