An equity loan allows you to borrow money from a lender to the amount of the money you have paid into a property. Equity loans usually refer to home equity where the loan provided is backed by the money you have paid into your home. There is a lien put on the equity of your home after you have borrowed the money.
Many people find an equity loan an appealing option due to the very low rates they offer. The low rates are mostly due to the fact that they are backed by a property you already own. However since the lien is put on your home, you may end up losing your home to the lender if you fail to pay. The lender may auction off the home and pay you the amount outside the lien.
A low rate equity loan can be used for a variety of different tasks. You can use the money to start a new home improvement project or put up an addition to your home. You can use it to take a much-awaited vacation or pay for your kid’s college tuitions.
Equity loan rates have been so low lately that some people even borrow the money to invest it. This can be a dangerous proposition however, since if your investment tanks you may end up losing your home.
There are two main types of equity loans you can get on your house. A home equity loan is a lump sum payment equal to a percentage of the money you have paid into your home. A home equity line of credit is different and works more like a credit card, where you borrow only the money you need from your home equity.
Equity loans have to be paid back, usually on a monthly basis. This includes the principal payment plus interest for the month. If you do not pay on time, you can end up ruining your credit and be forced to pay a higher loan rate on any credit you apply for. On the other hand, timely payments can help you raise your credit score so you are able to refinance your equity loans and secure even lower interest rates.
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Jakob Jelling is the founder of http://www.cashbazar.com. Visit his website for the latest on personal finance, debt elimination, budgeting, credit cards and real estate.
