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Equity Loans

Equity loans are popular when the interest rates are low. Any home owner would have, over a period of time, repaid some principal amount towards the mortgage amount. The difference between the fair market value of the property and the principal repaid by the owner is the equity held. This equity held in the home is used as collateral for these equity loans. Equity loans make sense when one has plans for making any home improvements or if one has a high credit card debt. Low interest rates and tax deductibility are the two main factors that attract homeowners to go in for equity loans.

There are two types of equity loans – term loans, also called closed end loans and equity lines of credit. These equity loans are also referred as second mortgage as the loan amount is secured by the property. As first mortgages usually run for a longer period, typically 25 to 30 years, equity loans have a typical life of 5 to 15 years. Equity loan or a term loan is a one time lump sum that is paid off over an agreed upon time with a fixed interest rate and regular monthly payments. An equity line of credit is just like a revolving credit. During the life of the loan, if any repayments are made, the credit revolves and one can use the repaid principal again. Usually equity lines of credit are offered with variable interest rates usually prime rate plus a fixed rate, for example prime plus 2%.

Before applying for equity loans one has to clearly understand the consequences of non payment of loan amount. Any delay in the monthly payment towards equity loans may attract penalties and might well end up in forfeiture of property. For people with too many financial problems equity loans are a sensible. One can get help from the internet as to the sources, terms and conditions for equity loans.