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Home Equity Loan Basics: What Are Home Equity Loans?

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The market has changed considerably in recent years regarding availability of home equity products, but it’s still a good idea to be aware of what they are and how they work.

A home equity loan is way to get a cash payment based upon the value of your home. They are not generally recommended unless you are in urgent need of the cash. However, in such cases, they are one of the best and least expensive ways of borrowing money. Why? What are home equity loans and why are they different from any other home loans?

A home equity loan is not the same as refinancing a mortgage for cash. Both use the equity of your home as a basis for lending but are arranged indifferent ways. A home equity loan is   strictly based upon the difference between what you still owe on the mortgage and the current value of your property.

In fact, you can negotiate loans on the equity of anything you own: commercial property, antiques, your boat or anything you are willing to sign over to the loan company as security against you failing to repay. Because the loan company can seize any tangible asset offered as security, you should make sure that you can afford the repayments.

Why Lenders Prefer Secured Home Loans

Should you fail to repay a home equity loan, the lender can force the sale of your home to recover its money. However this will normally be done only as a final resort.  Most lenders are willing to come to an agreement in order to prevent this.  It is not good for them to be seen to be quick to force the sale of an asset.

In spite of these potential problems – in fact because of them, you will be given significantly lower interest rates for a secured home equity loan than for a loan without security. That is one reason for such loans being preferred to regular unsecured loans at high interest rates. Lenders prefer secured home loans because it is easier to legally force the sale of an asset than get an unsecured loan repaid.

Potential Home Equity Loan Problems

Although the asset is the equity and not the property itself, lenders can force you to realize that equity. They can force the sale of your home if you don’t pay, and in most cases get an eviction order. It is very important, therefore, that you do not take such loans unless you are certain of your continuing ability to repay.

Most secured loans anywhere in the world use the borrower’s home as the security. In fact, your own mortgage is a home equity loan: your mortgage lender holds the equity of your home as part of its own insurance. To the lender, the equity is the amount you still owe on your mortgage. Even that is not guaranteed. Why?

Let’s assume you have a mortgage and your home is destroyed by floods.  You have no insurance.  You are still responsible for your mortgage, but you cannot repay it. The lender loses out because you have no money to repay even if they took legal action. You might think this could never happen, but think again. How about New Orleans in 2005? Enough said!

Home equity loans are useful to many people, but those that take them should keep the potential problems in mind.  What are home equity loans other than normal forms of loan that are secured on your home? No form of home finance is a problem in itself – it is making sure you can continue to repay where the problem lies. Make sure that you make the right decision by taking the advice of a professional mortgage advisor.

Related Information:
  1. Bridge Loans: The Need for Bridging Loan Finance
  2. FHA Streamlined 203(k) Loan: Loan For Moderate Rehab
  3. Financing Building a House: How to Finance Building a Home
  4. Funding Home Upgrades By Cash Back At Closing
  5. Hard Money Basics

Trace Richardson has written 638 articles on BankChirp.com

I'm Trace Richardson and am the founder of LeadPress. I’m a licensed California Real Estate broker and a former equities trader previously holding the Series 7, 63, 55 and 24 securities licenses.

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