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Home Equity Finance - Home Equity Loans and Home Equity Lines of Credit - What is a Home Equity Loan?, Home Equity Lines of Credit

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Home equity loans are loans in which homeowners use the equity, or the market value of the unencumbered interest in real property, of their homes as collateral. Home equity loans are often referred to as second mortgages or simply HEL. Home equity loans are often accompanied by numerous fees, including closing fees, early pay-off fees, title fees and appraisal fees. If you need to get your property surveyed, there will also be fees for this service.

Home Equity Lines of Credit

Sometimes home equity loans are confused with home equity lines of credit, and are often lumped together with HELs, but they are not the same. There is a major difference between a home equity loan and a home equity line of credit. A line of credit can be used over time and has an adjustable interest rate while HELs are offered as a one-time lump sum and usually has a fixed interest rate. Home equity lines of credit are often compared to having a credit card, and some banks may indeed issue you one. When getting a HELOC, borrowers are generally approved for a certain amount of credit and no more. They can withdraw or use the money as needed and make monthly payments. However, HELOC have a set term. When the end of the term has been reached, any money not already repaid must then be paid in full. Home equity lines of credit usually have higher interest rates than first mortgages, but much lower interest rates than credit cards.

Why Get Home Equity Loans Or Lines of Credit?

There are many reasons why homeowners may decided to apply for home equity loans or home equity lines of credit. They may simply need the cash. They may need money to invest in a new business venture. They may need to make a major purchase such as a car. Many homeowners borrow money to improve the home or property itself, such as building a swimming pool or remodeling the kitchen.

The Details of a Home Equity Loan

Each bank will have its own terms and conditions about how their home equity loans work. Using Wells Fargo as an example, borrowers can get loans with a repayment length of anywhere from five years to 30 years, depending on the amount borrowed and the preferences of the customer. Wells Fargo charges no fees to open the account, or annual fees, and offers a fixed interest rate. Customers can make regular fixed payments and pay additional principal balances without penalties. There is, however, a $500 prepayment fee if the account is closed within three years from the date of opening it. In 2010, the minimum amount of a home equity loan was $10,000, and the maximum was $500,000.

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