The recession affected those living in the United States in number of different ways. Some people lost hours at work, which made caring for their families difficult, and others found themselves drawing unemployment and scrambling to find a new job. The recession also did lot of damage to the housing market. More homes went on the market than there were buyers, which led to homes selling for well below market value. As many found themselves trying to rebound from the recession, they often looked at equity lines to cover the costs they have.
What is an Equity Loan?
A home equity loan is a loan that lenders give to those who own their homes. This is one of the few types of loans that don’t rely heavily on applicant’s credit score. Lenders base the loan on the amount of equity that a homeowner has built up in his or her home. Equity usually refers to the amount of money that a homeowner paid off on his or her loan. The lender agrees to give the applicant a specific amount of money, and the borrower agrees to use his or her home as collateral. If the homeowner fails to pay off the loan, the lender can foreclose on the house. The lender will usually take the amount owed out of the amount the house sells for and gives the remaining balance to the borrower.
How Does an Equity Loan Work?
The way an equity loan works is fairly simple. An individual who has a mortgage on his or her home can apply for a loan through the bank that owns the note on the house or another lender. The lender bases the size of the loan on the amount of equity in that property. If a homeowner has $10,000 of equity in the property, the lender may agree to give the borrower $20,000 to $50,000 or more. The borrower then agrees to pay back the loan each month. If the bank that owns the note extends the loan, the bank can bundle the monthly payments into the monthly mortgage payments on the house. An equity loan is usually one large payment that homeowners can deposit right into their bank accounts
What can Homeowners Do with the Money?
Once a financial institution gives an equity loan to a homeowner, the owner can use that money for anything he or she needs. Many homeowners use the money to pay for the cost of education for their students. They can use the money to pay for an older student’s college tuition or a private school tuition for a younger student. Others use the money as a way to make changes and improvements to the property. They hire a contractor to make an addition, install an in ground swimming pool, pay for a new roof or upgrade the HVAC or electrical system. Unlike other types of loans that require homeowners use the money in specific ways, an equity loan gives homeowners more freedom and control over how they spend the money.
Equity Loan vs. Line of Credit
Many people confuse the terms equity loan and equity line or credit or assume that both are the same thing. An equity line or credit is completely different from an equity loan. With an equity line of credit, homeowners can get money from a financial institution based on the amount of equity in their homes. The main difference is that they can only use the exact amount of equity they have. Instead of the bank giving them cash, they can use the equity as a type of credit. The bank will then add the amount owed each month plus any interest into the mortgage payments. Homeowners should work closely with their lenders to determine which option is best for them.
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