Home Equity Loan or Second Mortgage
Home equity loan or interchangeably called second mortgage is a type of loan vehicle where the homeowner uses his/her house as a collateral to borrow money from any of these: commercial banks, mortgage companies, thrift institutions, financial companies, and credit unions, or a thru a mortgage broker.
Two types of home equity loans:
There are 2 types of home equity loans: the lines of credit and fixed-rate loans. Both are used in terms that are usually ranged between 5 to 15 years although some reach up to 30 years.
The home-equity line of credit (HELOC) is offered with a credit limit and works like a credit card. The borrower is provided with a revolving credit where he will be allowed to spend the fund up to a certain point. Here, the borrower is issued with a credit limit depending on the value of his home multiplied by a certain percentage and then subtracted to the mortgage you owe. The home becomes the collateral and the credit should be paid in terms.
The standard home equity mortgage on the other hand works as a traditional loan. Here you can receive the lump sum payment at a certain and fixed interest rate. It is like lending money from a firm where you should pay on a monthly installment with added interest.
Benefits of home equity loan for Lenders
Just like any lending method, home equity can give big advantages to the lender. The lender will offer money to the borrower with an interest and additional fees. These interests and fees will then be their profit. But it is not concentrated to that alone. When the borrower fails to pay the total amount at a certain point, the lender can repossess the property which the borrower presented as the collateral. The lender will not only get the initial payments, it will also own the property. The lender can sell this and make more money.
Benefits of home equity loan for Borrowers
Whether the borrower needs to finance education, finance a vacation, improve his home, or any financial needs, home equity loan is the best and the easiest way to get the necessary finances. Home equity can also be a great tool to consolidate debt. And payment is easy. All the borrower has to do is to pay via credit card. In short, home equity loan is the fastest way to cash.
The Equalizer
Home equity loan can either work for or against the borrower. But it will never work against the lender.
For borrowers, the proper way to use this loan is to make sure that you have a regular source of income where you can easily pull out some cash for your mortgage monthly bills. In this way, you will not have any problem dealing with high interest.
On the opposite camp, lenders would not have any problem managing their collections for anytime the borrower fails to give his monthly payment, the lender can repossess the property and make more money out of selling it.
There is of course great risk but if you badly need emergency money and are confident you can pay it faithfully, getting home equity loan can work for you. If not, then you might need some more time thinking for yourself if are ready to have one.
