Types of Home Equity Loans: Equity Finance Options

Home equity loans are turning out to be a popular means of getting fast cash in large amounts. While a home equity loan is not a good idea for you if you are not sure about how you would pay it back, it can prove to be of great help for people who want a large sum of money for investing in property or business, furthering their education or paying for uninsured accidents or illnesses. Home equity financing is also a good choice for people who need money beyond their income on a regular basis. These loans are ideal for people who want a large sum of money for a low rate of interest.

All home equity loans are provided based on the equity of your house. What this means is that your lender will approve your loan based upon the value of your house from which all outstanding mortgage payments have been subtracted. Failure to pay back the loan on time will result in foreclosure of your home, which the lender will sell off to make good on his losses. While this is the basic rule that governs home equity loans, there are a number of other things that make for different types of home equity loans. Before you apply for a home equity loan, you should know about the different types of equity finance options in order to understand which one will be best suited for your needs and requirements.

A brief introduction to the two main types of home equity loans follows.

Second Mortgage: A second mortgage or a regular home equity loan is a loan whereby your bank or lending agency will provide you with a lump sum of money. In most cases, the repayment is based on fixed rates of interest and the payments have to be made on a regular monthly basis, just like in the case of a regular mortgage. However, the repayment period on second mortgages is limited to a max of 15 years as compared to the 30 years that you might get on your first mortgage. This kind of a home equity loan is also known as a closed end home equity loan because once you have received the lump sum, you cannot get any more advances from your lending company.

Line of Credit: The second kind of home equity loan is open ended credit or a home equity line of credit (HELOC). When you get a HELOC, you are given a time period over which you can draw money based on the equity of your home. Different types of HELOCs specify different maximum one time withdrawal amounts and term periods. If you keep paying back the amount you withdraw during the term of the loan, then your credit line keeps on regenerating, which means that as long as you do not run down the total equity of your house, you can keep drawing out money from your HELOC account. In general, home equity lines of credit need to be paid back based on floating rates of interest, but the payments are not regular or monthly and are based upon the amount that you withdraw.