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Debt Management Tips - Understanding Home Equity Loans

Home equity loans are loans that you can take out using the equity of your house as collateral. You can ask an appraiser to make an estimate on the value of your house and compare the numbers to your mortgage. If there is more value to the house than you owe to the bank for your mortgage, you have the possibility of getting a home equity loan. It is a way of taking the value of your house and making that value available to you.

There are different reasons for why anyone would take out a second mortgage on their house. It could be that your house needs some big construction adjustments or repairs, you may have received a medical bill which is not covered by insurance or your child is starting college in the fall and your savings didn’t count on medical school. These are of course very good reasons to liquidate your money, but you still need to think of the consequences. Make sure you know what you can afford on monthly payments and don’t take out more than you absolutely need to, otherwise your medical bills may be paid for or your child may become the best doctor ever, but if your house goes into foreclosure it is too late to think about if it was really worth it.

Luckily the providers of home equity loans don’t tend to dive into the deep end. They don’t give out the loans to just anybody who has value in their house. Often they require an excellent credit history and they only go for reasonable loans compared to the value and tune their interest rates on that information combined with the type of loan you are applying for.

There are two different kinds of home equity loans. The closed end home equity loan is the kind that has an actual ending date in the contract. By this date the entire loan including interest has to be paid off. The monthly payments are calculated in an order that will make sure the loan is paid off when the contract ends. The open end home equity loan doesn’t really have an actual ending date in the contract. The monthly payments are interest only and the total amount of the loan will be paid off once the house is being sold in the future.

Even though the payments for an open end loan are generally lower, because of the interest only calculations, it is probably a wiser decision to go for the closed end loan. That way you know exactly when you have paid off your loan and when the time has come to sell your house, for whatever reasons, you pay the equity in your house to yourself and maybe have a nice retirement.

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