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SpinDistribute.com Article Directory

The following article was published in our article directory on November 23, 2012.
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What Exactly is a Home Equity Loan?

Article Category: Finances

A home equity loan is forbearance or a line of credit taken out on the remaining equity on your home. This is connected to but not the same as a principal home loan, secondary home loan, or a refinance. The goal is to avoid confusion and to allow a homeowner to effectively utilize the dormant equity of a home, without the risk of losing the same.

The Concept

A home under an existing mortgage is usually partially paid for. The same payment increases after every amortization. Think of it this way, every amortization payments made is money you have placed in a huge piggy bank known as your home. If you ever need money for major repairs or for emergency use, you can dip into that piggybank. And since other mortgagors are only concerned with money you have not paid. On the other hand the equity lender is interested on in amortizations you have paid, because it corresponds to your interest in the property.

For example, Mr. A wants to make renovations to his home. The same is under an existing mortgage agreement with Lender BCD. Mr. A has already paid 40% of the total amount due, representing 144 of 360 amortization payments or $400,000 out of $1,000,000 loan. Let us assume the market value is also $1,000,000 for expedience sake. This means Mr. A can borrow a maximum of $500,000 using the $500,000 worth of equity in the home.

Home Equity Loan Term

This is the first type which is simply a loan, payable to the borrower in full. The lender undertakes to give the full loanable amount to the borrower. The borrower undertakes to pay regular installments representing the principal and interest.

Home Equity Line of Credit (HELOC)

This is technically a type of home equity loan. This is because the loanable limit is also based on the remaining equity in the home. However some learned commentators argue that the same is a different species altogether. The reason is because, the lender undertakes to pay as much as the loan amount. Whereas the borrower is free to take out any amount up to the maximum amount whenever he/she wants, much like a financing agreement. Provided it is within the specified period to do so.

For example, let us assume that Mr. A took out a HELOC. Lender BCD tells Mr. A that he is free to withdraw anytime, up to the loanable threshold. This means Mr. A can take it out at one time, treat it much like income and withdraw on a monthly basis, or even withdraw on a daily basis.

Bad Credit Mortgages

The good news about an equity loan is that the lender is only interested in the equity paid into the home. This is the security arrangement in case you do not pay. This means that regardless of how bad your credit rating is, as long as there is substantial equity, you will get loan approval. And, since your poor credit rating is not considered plus there is collateral, the interest rates will be lower.

Keywords: Mortage Financing, Financing, Home Equity Loans ,Bad Credit Mortgages ,Poor Credit Mortgages, Self Employed Mortgages

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