A fixed rate home equity loan, sometimes called 'second mortgage', is a borrowing against the equity of your home. Equity means the current market value of your home minus the outstanding liability. Certain percentage of that net worth is advanced as loan. This is known as Loan To Value (LTV) ratio. Disbursement of the amount sanctioned is made in one lump sum. Normally you can choose up to thirty years for amortization. The amount of monthly repayment inclusive of interest is fixed.
Lenders usually stipulate a minimum and maximum for the amount that can be sanctioned. The longer the amortization term, the interest rate will be higher though fixed. You must decide on the period for which the loan is to be taken based on your repayment capacity. The interest paid qualifies for tax deduction in most cases. The money obtained through the loan can be used for any purpose that you choose. It is prudent to utilize the funds to pay off high interest bearing advances like credit cards. If the money is spent for home improvement, your equity enhances.
Before applying for the loan it is wise to analyze the specific purposes for which the funds are required. Obtain a few quotations from different lenders and do a comparative study of the terms and conditions. Be wary of loan sharks and hidden costs. And remember that the cost of a loan is not constituted by interest alone. The chances are that there will be closing charges. Some lenders may stipulate other fees as well. A penal charge being imposed for pre-closing the loan is quite common. Those with poor credit rating may find it easier to obtain home equity loans.
There are risks involved. If repayments are not made on time, you could end up losing your house. If the house is sold before paying off the loan the money you get in hand will be limited.
Get all your doubts clarified before signing on the dotted line. Check with your financial advisor. Or you could get free consultancy from organizations approved by the U.S. Department of Housing & Urban Development (HUD).
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