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Home Equity Loans – What You Need To Know

In this time of economic turmoil, more and more people rely on loans to help them get through while waiting for the next pay day.  It has become ordinary for people to apply for a loan if they are planning to buy a property or making some renovations in the home.  A Home Equity Loan is one option that people frequently use in times of financial emergency.  However, what is Home Equity Loan?  How does it work?

Home Equity Loan is one type of loan wherein you get another loan on an existing mortgage from the same lender.  Simply put, it is to take out another mortgage on your mortgaged property.  Hence, a home equity loan is also known as a second mortgage.

There are two types of Home Equity Loan: the Fixed Rate Loan which is similar to a fixed rate mortgage and Line of Credit Loan.  Both of which can be given from 5 to 15 years.

There are 3 simple yet very important aspects of Home Equity Loan that you need to know.  The first one is you cannot sell your house or property unless it has been paid.  Second, you can get another loan but your lender will only give you an amount equivalent to what you have already paid from the original mortgage.  Lastly, for Home Equity Loans of as much as $100, 000, the interest paid is tax deductible.

Now that you are aware of these essential information, this article will further explain the benefits and disadvantages of Home Equity Loan.

In Fixed Rate Loan, the lender gives you the amount you loaned in cash.  As the name implies, the rate of interest is a fixed amount, which does not change over time.  With this type of loan, you know precisely how much you need to pay every month.

On the other hand, a Line of Credit loan has a fluctuating interest rate.  This loan can be used the same way as a credit card which means you can take out any amount when you need it over a specific time period or term.  Consequently, this means that the amount you need to pay every month will vary, subject to the amount you have cashed out that month.  Note that by the end of the term the amount past due has to be paid off in one lump sum.

Today where unemployment rate increases while the salary decreases, many people find it hard to take care of monthly expenses without taking out a loan.  Although a home equity loan can definitely help when you are faced with financial difficulties, there are a few risks involved.  Before you take out a home equity loan, keep in mind that you will need to pay interest on two loans simultaneously while the lender gets a substantial profit.  Should you fail to pay the loan, the lending institution will keep all that you have paid on both loans.  Not only that, your property is at risk of being repossessed in the process.

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