A Home Equity Loan, also known as a second mortgage, is a loan taken against the equity in the home. There are two types of home loans that allow you to access the equity in your home; those with a fixed rate with a defined term and those that are a line of credit, similar to a credit card.
A Home Equity loan can be a good solution if you have a steady and reliable source of income and confidently believe you can repay the loan. Home Equity loans are a good idea if you need additional income to cover large costs such as home repairs or remodels, college expenses, debt repayment, or emergency expenses.
Fixed-rate home equity loans have a fixed rate and a fixed term, which is usually a 15-year maximum loan term. All proceeds are received at the closing and the loan is fully amortized.
Also referred to as HELOC, these loans are a revolving account that’s secured by the equity in the property. Funds are only drawn on an as-needed basis, up to the maximum line of credit. The interest rate on the loan will vary when the index varies because the loan being tied to the prime market index. The loan will fully amortize when the payment period has expired.
If you have fallen into a cycle of spending and borrowing, called reloading, sinking deeper into debt isn’t a wise solution (and it may be time for a reality check, too) because reloading often leads to a never ending cycle of debt. It’s also not a good idea to take out a Home Equity loan if the loan is more than the value of your home. This is a sign of poor financial judgement and the increase in debt, interest and fees could lead you to bankruptcy.