What Exactly are Home Equity Loans and Home Equity Lines of Credit?

Conventional wisdom often shared by parents has been to live within our means. That is, to only spend as much as we can, based on our income. However, these days, we live in a credit fuelled society enabled by low interest rates.  Lenders such as banks and other loan providers  offer mortgages and loans for many reasons including buying a home, to pursue higher learning and to start a business.

Concept of a Home Equity Loan

The approval of a home equity loan by a bank depends on various factors and is assessed on credit worthiness that include employment income or other income along with the ability of the borrower to pay back the loan. An assessment of individual’s borrowing history and diligent on-time repayment can also play a role. Loans are based on certain interest rates, whereby people can pay back a portion of the borrowed amount and the interest each month over a certain number of years. For example, loans can extend from 5 to 30 years, and over those years you are paying off a more significant portion of the loan, with a monthly payment.

… revolving line of credit, like a credit card, that lets your access your home’s equity to use as much as you need while only paying the interest.

Concept of a Home Equity Line of Credit 

Something similar but different is a Home Equity Line of Credit (HELOC). This is also a loan that you take against your home’s equity, generally up to 80 percent,  but the money is not disbursed at one time. It is a revolving line of credit, like a credit card, that lets your access your home’s equity to use as much as you need while only paying the interest.

The Mechanism of House Equity Loan

You should research which banks or mortgage lenders provide the lowest interest rates and fees for Home Equity Loans or Home Equity Line of Credit (HELOC) before deciding on one. The interest rate(s) and terms and conditions of these types of products tend to be slightly higher and rigorous than other mortgages.   If you were to default on a home equity loan or a HELOC, all mortgages registered on the subject property may have to be paid off in full.