Home Equity Loans
A home equity loan, sometimes also called an HEL, is a loan for which a borrower uses his home equity as collateral. This loan is also almost similar to second mortgage loan. Your equity is inherent in your home and cannot be separated from it.
Most people go for home equity loans to finance renovation of home, medical bills, education or wedding bills etc. Normally you should have a good credit rating to obtain a home equity loan at a lower rate of interest. If your credit rating is poor, you may have to pay a higher rate of interest.
Sometimes, you can get home equity loan in the form of home equity line of credit (HELOC). A home equity line of credit is a kind of revolving credit. It carries an adjustable interest rate and you can draw any amount you need within the maximum limit of your loan. HELOC functions like a credit card; you can withdraw the amount you need and not the amount that is sanctioned. The advantage is that you have to pay the interest only on the amount withdrawn and not the amount that is sanctioned. In case of home equity loan, you get the entire amount in one lump sum and you have to pay the interest on the entire amount that you have taken. Like the home equity loan, a HELCO is also obtained by mortgaging the home equity.
There are several advantages of home equity loans:
Given the fact that a home equity loan is backed by collateral, it means less risk for the lender. Consequently, you can obtain the loan at a lower rate of interest.
Your interest is tax deductible on the first £100,000 that you borrow. Credit card loans or other unsecured loans do not carry this benefit.
If you opt for HELOC, you need to pay interest only on the amount borrowed and not on the amount sanctioned.
It is easier to get home equity loan even if you have a poor credit rating. This is because the loan is backed by collateral and the lender can always sell it off to get back his money in case you default on your payment.
As a home equity loan is a secured loan, you may lose your house if you default on your payment. The creditor may repossess your home and sell if off to recover his loan.