Home equity loan (referred as HEL) is a type of loan which allows the homeowner (borrower) to use the equity in their home as collateral. Home Equity Loans are generally used to finance major home repairs, medical bills etc. HEL is a debt against your property; lender can sell your property if you fail to back money back to him. Interest paid on home equity loan is tax deductible that makes it more popular.

Home equity loans have term of five to fifteen years and loan must be paid in full if the house is ever sold.

Types of Home Equity Loan

• Fixed rate loan
• Line of credit.

Fixed Rate Loan: In this type of loan, borrower gets single and lump-sum payment, which needs to be repaid over a period at mutually agreed interest rate. Rate of interest and payment remain same over the entire life of the loan.

Line of Credit: In case of Home Equity Loan Line of Credit (HELOC), rate of interest is just like a credit card. Lenders’ approve certain amount to borrower which he can use through a card or special checks provided by lender. Borrowers can make monthly payment however amount of payment varies as per the interest rate and amount borrowed. At the end of the term of the loan, borrowers must repay the balance amount in full.

Benefits of HEL to Borrower

• Easiest source of cash.
• Interest rate is lower than the interest on credit card and other consumer loans.
• Interest paid on home-equity loan is also tax deductible.

Benefits of HEL to Lender or Banker

• After the collection on original mortgage, lender is still in a position to collect more interest and payment from borrower.
• In case borrower fails to repay the loan, lender has the right to keep all the money from the original mortgage and home equity loan.
• Inefficiency of borrower to repay loan entitles the lender to repossess the home, sell it and begin the cycle again with the other owner.

Opting for Home equity loans is a wise financial decision by any homeowners who wants to pay lower interest rate and pay off unforeseen expenses.