So what is this product we call the home equity loan? It is a pretty basic idea - you have equity, in this case your home, and a lender will lend you some money knowing that if you fail to pay for some reason they can make you sell off the equity (your home) to pay them back. This might seem simplistic and maybe a little negative, but the first message to get across loud and clear is that your home is what you are risking!
This is why the product is also called a second mortgage. And just like the first one, if you cannot make the payments you stand to lose the roof over your head. This means there are several things that you should be sure of before taking out a home equity loan. Clearly you must make sure that you can meet the payments.
There are several things to look out for when agreeing the payments, and these guidelines are particularly important if you are looking to secure a loan online. This is because the big advantage of the Internet can also be the problem. Internet shopping tends to mean consumer choice thanks to the stiff competition. It means, on the plus side, that you can get very competitive rates and low fees. But it also means that pretty much any combination of package, fees and repayment schemes are available online. The trick is to navigate these so you get the loan that you need.
So what should we be watching out for? Well the key point is still making sure you can afford the repayments on the equity loan. This means watching for discounted schemes that mean you start off making a manageable payment but at some point, maybe after a year or two, the rate leaps and leaves you struggling to meet the schedule. Though they are very common, these short term discounted schemes need to be treated with a lot of care - always be sure that you really will be in a position to pay, do not simply hope everything will be okay.
Another thing that most financial experts will warn against are 125% home equity loan schemes. As the name suggests, these allow you to get more money than your home is worth. The reason you should be careful about taking these out is that if the value of your home does not rise sufficiently and you sell it before the loan term, you will have to pay the difference in one big lump sum. Not pleasant.
It is not all gloomy on the online second mortgage front however. There are some big advantages in releasing money in this way when you compare it to other products. It is a secured loan, which means it uses your home as security, and this lowers the risk for a lender. In effect this means you will get better interest rates than for an unsecured loan.
This loan is usually tax deductible (except any part with a value greater than your home), just like a standard primary mortgage, which can make it a smart choice when compared with other loan types. Because there are many good deals to be found online, it can be just the right choice for some homeowners, provided that they use their brains throughout the process!