What Is A Home Equity Loan

A potential borrower should ask, "What is a home equity loan," before endeavoring to choose from the large amount of financing options available on the market today. With so much misinformation, talking to a qualified mortgage professional will help a potential borrower clarify their choices and abilities before signing papers for debt that may or may not be suitable for their current situation. Should every homeowner who needs cash seek a second mortgage? Are there multiple kinds of home refinancing instruments that carry with them pros and cons? These are the types of questions can only be adequately answered by a financial professional who has the borrower's best interest in mind.

Writing the questions down before meeting with a mortgage professional always proves beneficial for remembering all the intricacies and points of confusion that may be bothering the borrower. This will ensure that questions will not be forgotten or overlooked during the meeting. What is a home equity loan? For obvious reasons, that question holds the highest priority when meeting with a financial representative. A mortgage planner will answer, "What is a home equity loan," with not just the definition, but also the options available to his client. "Ask of me, and I shall give thee the heathen for thine inheritance, and the uttermost parts of the earth for thy possession." (Psalm 2:8)

Home equity loans are types financing that use the borrower's equity in their home as collateral for the financing. The lender will allow the borrower to finance the full amount of the accrued equity of their property. This means that the borrower does not have any more accrual left when the second mortgage begins. However, this type of financing proves helpful should a homeowner have unforeseen medical bills or education costs that are over of his ability to pay. The answer to: "What is a home equity loan?" in this case would be a lending instrument that takes accrued principal in exchange for instant cash. There are many more questions to ask of the lender. Another pertinent distinction becomes distinguishing financing from a line of credit. Lines of credit are open ended revolving debt that can not exceed the accrued principal amount of the borrower. The homeowner can get money from the line of credit, like a credit card. They can borrower more than one time, as long as they do not exceed the maximum set by the lender.

The length of the repayment period is usually shorter, when asking, "What is a home equity loan, as apposed to the original mortgage?" Mortgages usually run for 15 years, 20 years or 30 years. However, second mortgages rarely exceed 10 years. Length of repayment should always be considered before accruing new debt. Futures are never set in stone, so shorter repayment times are a little easier to plan for, rather than trying to guess what the income of a borrower will be in 30 years. For this reason, lenders feel more comfortable financing a loan or line of credit with a shorter repayment period.

When discussing a second mortgage with a qualified lender may provide more questions than answers. There are closed end and open end home equity loans. Of which is the borrower asking? When asking, "What is a home equity loan?" most borrowers are referring to a closed financing agreement. In a closed end second mortgage, the borrower will get one lump sum of money comparable to the accrued principal that he has earned. The lump sum does not only depend on the amount accrued over the years. The amounts of the financing packages are also dependent on the borrower's credit score, credit history, current income and appraisal value of the home. Why are appraisals necessary when equities, not the home values, are the collateral? By appraising the current market value of the house, the appraiser and the financial representative may deduce that the borrower has even more accrued equity than originally thought. This happens often in cases when the homeowner has been paying mortgage payments on the original loan for over 15 years. The homeowner paid down the principal of the original financing amount, but the house itself has appreciated with the market.

As the borrower ponders that pending debt transaction, the professional lender will further explain, "What is a home equity loan?" by further defining the amortization process. Amortization is just a long word for spreading a big debt over time into tiny payments. The term of a second mortgage can be up to 15 years, though is usually around 10 years or less. If the financing package is not amortized then the lender will owe the whole amount when the 10 years is over. If the borrower does not get specific when seeking the answers to his questions, he might accidentally get into a nonamortized finance package. Doing the research can ward off this mistake, but if the borrower finds himself in a finance package like this, paying monthly as if there were standard payments can ease the financial blow at the end of the loan period.

Unlike a closed end second mortgage, an open end is more like a line of credit or credit card. The borrower can borrow as often and as much as they want as long as it does not exceed the total amount of the appraised value, less any lien currently held on the property. The interest rates are usually variable, unlike the fixed rates of the closed end second mortgages. It would benefit a homeowner to be specific when asking, "What is a home equity loan?" This will lead to only the amount of debt to meet the current financial need.

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