Home Equity Loans

A home equity loan is also called a second mortgage. It allows homeowners to borrow money through the leveraging of the equity in their homes. These loans became very popular in 1996 when they

provided a means for consumers to deal with that year's tax changes. With a home equity loan, homeowners can borrow up to $100,000 and deduct the interest in their tax returns.

There are two types of home equity loans: fixed-rate loans and lines of credit. Both come with terms that usually range from five to 15 years. Further, both types of loans must be completely repaid if the home on which they are borrowed is sold. Fixed-rate loans provide a single payment to the borrower. This is repaid over a pre-determined period of time at pre-determined interest rate. The payment and interest rate do not change over the life of the loan. A home equity line of credit (HELOC) is different. A variable rate loan, it functions like a credit card and may come with one. Accordingly, borrowers are pre-approved for a spending limit; they can withdraw money at their convenience through a credit card or special checks. The monthly payments depend on the amount of money borrowed and the current interest rate. Like fixed-rate loans, the home equity line of credit has a specific term. At the end of the term, the outstanding loan amount is to be repaid.

Home equity loans are an easy source of cash, so to say. Even though the interest rate on a home-equity loan is higher than that of a first mortgage, it is much lower than that of credit cards and other types of consumer loans. Further, by consolidating debt with the home-equity loan, individuals can get a single payment, tax benefits, and a lower interest rate. These benefits aside, many people abuse these loans and enter a cycle of using them to spend money frivolously on miscellaneous items and services or to finance huge home improvement projects that will not increase the value of the house in a significant way. It is always wise to take steps that would ensure that financial security.