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Differences: Equity Loan, an Equity Line of Credit, and a MortgageGetting a home equity loan or line of credit involves getting a loan that puts your home up as collateral. This means that you guarantee to pay off the loan or line of credit and, if you fail to repay it under the terms that are defined, the lender can take your home and sell it in order to get the money back.
What is equity?
Equity is a term used to describe the amount of money your home is worth, minus what you still owe on it. In essence, this is the amount of money you would be expected to profit if you sold your home for its appraised value. Because you can “make” this amount of money by selling your home, lenders are willing to loan you money based on this monetary amount.
Of course, there is some room for error when determining the value of your home. In addition, there is no guarantee that you will be able to actually sell your home for the full amount of its appraised value. As a result, lenders will only lend you a percentage of the equity you have built in your home. Often, this guideline is set at 80%.
Why would I want to get a home equity loan?
There are a number of reasons for getting a home equity loan. For example, you might want to get a home equity loan in order to pay toward making improvements on your home. A home equity loan can also be a great way for you to consolidate your debts or pay for college expenses.
What’s the difference between a home equity loan, a home equity line of credit, and a mortgage?
Both a home equity loan and an equity line of credit allow you to change the equity in your home into cash, which means both are commonly referred to as a second mortgage. But, there are a few subtle differences between each of these loans and between an equity loan and a mortgage. First of all, a mortgage is generally set up to be repaid in 30 years (think about obtaining mortgage life insurance for the duration of the loan). Equity loans and equity lines of credit, however, generally have repayment periods of 15 years. It is possible for mortgage loans and equity loans to be longer or shorter than these periods.
A home equity loan involves receiving a lump sum of money, which you repay with a fixed monthly payment. After receiving the money, you cannot continue to borrow from the loan. A home equity line of credit, on the other hand, is like a credit card in that it allows you to continually borrow from the line of credit you receive. This means you can withdraw money whenever you need it, so long as you never exceed the total amount of the loan. You can continue to borrow money from your equity line of credit as long as there is still room left on the loan. It gives you more flexibility than a loan, but it also makes it more likely for you to fall into deep debt.
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