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It is important to understand the working of home equity loans before getting one.

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Understanding Home Equity Loan

What is Home Equity Loan? Home Equity Loan is a type of consumer loan that is secured by a second mortgage. This loan allows you to borrow credit against your equity in the home. The basis of this loan is formed on the difference between the equity of your home and the current market value of your home.
When you apply for a Home Equity Loan you use the equity in your home as collateral. Home Equity 

Loans also fall under the kitty of loans that are mostly taken in order to meet the expenses of home repairs, college education, medical bills, to consolidate or pay off credit card bills, etc. In simple terms when you opt for home equity loan, a lien is created against your home and the actual home equity is reduced.

There are two types of home equity loans namely home equity line of credit that is variable and home equity loan which is for a specific fixed term. These loans are also known as ‘second mortgages’ and are secured loans as they are secured against the property value. Generally, home equity loans are advanced for short span unlike first mortgages.

Home equity loan is used for the purpose of refinancing and you cannot purchase a home against home equity loan. Home equity loan is a onetime lump sum amount that is advanced to you for a fixed rate of interest unlike home equity line of credit (HELOC) which is a line of revolving credit and comes with an adjustable rate of interest.

Type of Fees
– When you plan to opt for a home equity loan then you need to have a clear understanding of different types of fees that may be levied on you when your application for the loan gets processed. The following type of fees may be applicable. However, these fees may vary from bank to bank.
  • Stamp Duties
  • Originator Fees
  • Early Pay-Off Fees
  • Appraisal Fees
  • Closing Fees
  • Title Fees
  • Arrangement Fees

Home Equity Loans: Things to Know 

  • Retirement Planning Gets Affected - Home Equity Loans may have an impact on your retirement plans. Generally, home equity loan is viewed as a steady source of raising funds for senior citizens in their time of medical emergencies or in their post retirement phase. If young blood lays hand on this loan it negatively affects their long term retirement and financial goals.
  • Repayment Capacity – Before you move ahead with the plan of opting for a home equity loan you need to have a crisp understanding of your financial position and your repayment ability. Before opting for this loan consider your credit worthiness and analyze all the other debts in your name. Ensure that you will be able to pay your monthly installments towards the home equity loan repayment account.
  • Last Resort – Home Loan Equity should be considered as your last resort when all the fund raising options seem fading. This loan should not be taken merely to fulfill your day to day needs.
  • Raising funds for Investments – If you are applying for home equity loan in order to raise funds from other investments then make sure the returns that you earn are more than the cost of borrowing this loan. Only then the effort for opting for this fund will not go futile.
  • Used to Repay other Loans - Many people lay their hands on home equity loans in order to write off their existing loans. However, this should be done very cautiously. 

Useful Tips Regarding Home Equity Loans 

  • If you think home equity loan is a permanent debt and will be paid off only when you sell your house then you are mistaken. It is a short term debt for a fixed interest rate.
  • Home Equity Loan should not be taken or used for the purpose of meeting day-to-day expenses.
  • Home Equity Loans do not come to your rescue if the value of homes in your area is going down.
  • If you have foreseen the demand for home equity in near future then laying your hand on a home equity loan would not be a wise idea.
It is always advisable to be cautious and act with due diligence when you apply for home equity loan. Explore and consider the charges, expenses and fees involved in acquiring this loan. Opt for flexible loans instead of falling in for loans that stretch for a longer span and come at higher rate of interest. The penalties of non-payment or late payment are more critical in case of home equity loans. You should never forget that i order to write-off your existing debts; you are replacing your unsecured loans with a secured credit that has a longer duration. So, save your home equity loan only for emergencies!