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Equity Loan
Equity loan is sometimes called by different names such as home-equity loan, second mortgage or home equity line of credit (HELOC). An equity loan is a loan or line of credit secured by your home. The lender allows you to use the equity, or the difference between the market value of your home and the amount you owe, as collateral, or security, for your second loan.
A home-equity loan basically allows you to turn your equity into cash to payoff anything that you want. Since your home is likely your most valuable asset, people tend to take out home-equity loan for major items like education, medical bills, home improvement, or investment in another property. The repayment period for a second mortgage or home-equity loan is usually set up to be half the length of your first mortgage loan. For instance, you are set up to pay off your first mortgage in 30 years. On your equity, you will have 15 years to pay off. However, that is not a hard and fast rule. Sometimes, the payment period for a home-equity can be as soon as 1 year to 30 year like on your first loan, depending upon your lender. The interest rate for your home-equity loan is usually adjustable rather than fixed, and it is also usually lower than the rate for standard loans or credit cards. As a borrower, you would have an easier time negotiating the interest rate with the lender since you are using your existing home as collateral on the loan.
Many lenders set a credit limit of your equity line of credit at 75% of the appraised value of your home. For instance, the current market value of your home is at $100,000. 75% of that amount is $75,000. Let’s say that the amount that you currently owe is $30,000. So the maximum amount that you can take out under your line of credit has a limit of $45,000.
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