Home Equity Loans

Definition of "Home equity loans"

Loans based on the equity of the home. Interest payments on home-equity loans are tax deductible. They come in two varietes: the traditional; second trust deed ( mortgage) and the home-equity line of credit. The advantages of home equity loans include:

  1. Low interest rates because the loan is secured by a house, and it usually bears variable rates.
  2. No loan processing fees. There is no need to go through a loan application and incur fees each time money is borrowed.
  3. Convenience. A check may be written only when money is needed. Interest is charged only on the amount borrowed.

Pitfalls of home equity loans include:

  1. High points. Points imposed on a home equity loan are based on the amount of the credit line, not on the equity loans have no caps on interest rates.
  2. High balloon payments. Some loans require a large balloon payment of the principal at the end if the loan period.
  3. Long payback period. It is convenient to have to pay a small minimum amount each month, but stretching out the loan payback period usually means higher interest rates.
  4. Risk of home loss. Unlike other loans, there is risk of losing a home. It may be difficult to sell the home fast enough and at a fair market value to be able to meet the balloon.
  5. Frivolous spending habit. One may get into the habit of spending on unnecessary things.

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