Thursday, 28 April 2011

Facts about Equity Loans

By Dana Cain


Home equity loans are offered in various forms, including credit lines. Offered in one large sum to the borrower is an equity loan and it's often used to pay off debts, pay tuition fees, reduce interest on credit card debts, etc. A credit line can be offered for a number of years, which allows the borrower to use the credit for any purpose, often in amounts limited by the lender. The line of credit opens up again as repayments are made and funds can be withdrawn by the borrower for a different purpose.

Usually calculated at the Prime rate is the interest on credit lines and they're not based on fixed intervals. Unlike with a home equity loan, you can pay higher interest rates. Home equity loans are often at a fixed interest rate, providing more protection to the borrower.

Calculated based on your home's equity is an equity loan. If your home is not worth the amount you have applied to borrow, you may pay higher interest rates and therefore higher repayments. This is considered a higher risk and is called negative equity. An evaluation from a surveyor may be required before you apply for the loan and the equity is also determined by current market value.

The lender wants to be assured that repayments can be made which is why a home equity loan also takes into consideration the borrower's salary. Some lenders are less strict on this factor, but it is important that the borrower is sure they can cover the repayments before they consider a home equity loan.

Requiring a 5-10% deposit is your home equity loan which can also help in mortgage payments and reducing interest rates. An equity loan is intended to pay off your first mortgage and then the new loan, although a 100% loan will incorporate all costs including additional fees involved in the purchase of a home. These loans include the deposit, therefore you do not have to have available cash. The interest may be higher on 100% loans too.

Before you consider a home equity loan or credit line, find out from lenders what the benefits and disadvantages of each are, and consider which type of loan will best suit your ability to repay the loan. Offered by different financial institutions are different loan packages which have other benefits and varying interest rates. Shop around and make sure you get the possible deal before you sign on the dotted line.




About the Author:



No comments: