Home Equity Loan Terms Explained

Posted by EHL on Thursday, June 14, 2007 - 02:41 AM

In this article we will try to explain the terminology the average consumer will encounter when looking for a home equity loan. A home equity loan, also known as a second mortgage allows a homeowner to borrow money using the equity in their home.

Mortgage

A mortgage is a temporary and conditional lien or claim against a property. The claim or lien is granted to a creditor as security for the mortgage debt. A mortgage also refers to the contract or deed that specifies the terms of a mortgage.

Equity

Equity as it pertains to a property is the residual value of the property beyond any outstanding mortgage or liability.

Fixed-Rate Loans

Fixed-rate equity loans are as they sound - the payment and interest rate of the loan are set for the lifespan of the loan. The fixed-rate loan allows the borrower of the loan to receive a single lump-sum payment. Terms on fixed-rate loans can vary from 5-15 years or more depending on the lender.

Home-Equity Line of Credit or Variable Rate Loan

A home equity line of credit or variable rate loan is a consumer choice loan where the borrower is in effect pre-approved for a certain amount of money, and can draw against that amount when needed. Payments on a home equity line of credit vary according to the current interest rates and the total amount borrowed. Payments and other terms vary according to each lender. Some offer very flexible repayments in order to attract consumers.

A home equity loan whether it is the fixed-rate loan type or the home equity line of credit type, can be a tempting choice for consumers. Consumers should know that interest rates on these types of loans could be higher than their first mortgage was. Consumers should work hard to find the best rates if choosing a home equity loan. Because in the end, what you are doing is using your home as collateral on the loan. If you can't pay, the lending institution may seek legal redress against you.