Home Equity Loans All secured loans require some type of collateral and the most popular type of collateral for secured loans is your home. A home equity loan or HELOC is a loan that uses your home as collateral if you fail to pay the loan. Other uses of these loans are to help finance home repairs, college, medical bills, and other large expenses. Using the equity in your home to pay off debts reduces the amount of cash you will receive when you sell your home and may even place you in a position that might force the sale of your home should the interest rate on the HELOC becomes too great for you to manage.
Qualifying for a Home Equity Loan
Generally, you need to have excellent credit in order to qualify for a home equity loan making this option less appealing to those struggling with debt.
Types of Home Equity Loans
There are two types of HELOCs called closed end and open end. A closed end loan is where you receive the total loan amount and begin paying interest on the full amount immediately.
An open end HELOC is like a credit card. You use the credit as you need it and pay interest on the portion of the balance that you have used. At some point, the loan will need to be repaid in full and the payments generally rise.
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