How a Home Equity Loan Work?
1. Mortgage: The title of ‘second mortgage’ is defined as the home equity loan is related to a mortgage and the equity in the property acts as the collateral for the lender. The traditional home equity loans have a fixed term as that of the conventional mortgages. The borrower needs to repay the principal and interest during the fixed tenure and if the borrower defaults in repaying, the home could be sold to the lender to cover the outstanding debt.
2. Value: The amount that a borrower is allowed to avail is based partially on the combined loan-to-value (CLTV) ratio of 80% – 90% of the estimated property value. The amount of loan and interest rate is charged also based on the credit score and payment history of the borrower.
3. Conversion: Home equity loan is a way of converting the equity of the home into cash. It serves better when that cash is used in renovating the house and increasing the worth of the house. One should keep in mind that as their home is used for this loan, if the real estate price decreases, he/she could end up owing more than the value of the home.
4. Precaution to be Taken: If one is willing to relocate, he/she might end up losing money if the house is sold or is unable to move. Further, if the loan is availed to pay off debt of the credit cards, he/she should reconsider the urge of using up those credit cards again. One should always look into all the options available before assigning their house into jeopardy.