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Home Equity Loan: What You Need to Know?

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By : Roby Hicks    99 or more times read
We are aware of the different types of financing. We borrow money if we want to purchase a house. However, we can also borrow money for other reasons. Most of us borrow to renovate our home. Most of us also borrow in order to send our children to college.

One of the most known forms of financing is the home equity loan. But what do we really know about it? When is the best way to use this type of financing and how do we qualify? These are just few of the information we need to know.

Understanding the HEL

This type of loan is also known as HEL. HEL is a type of loan that uses the property as collateral. Because of this, a lien is created against the property. This decreases the value of the property. There are two general types of HEL. One is the open ended and the other is the close ended. The close ended HEL is a type of loan wherein the borrower receives a lump sum amount. Normally he is given about 15 years to pay for the amount borrowed at a fixed rate.

The other type of HEL works like a credit card. In an open ended HEL, the borrower gets to have access on the borrowed amount. Although the interest may be fixed, the amount he will pay for the interest will not be the same every month because it will be based on the amount he used. Additionally, he is only asked to pay a minimum amount each month. However, he will be required to make a balloon payment of his loan during its maturity.

How to qualify

Just like any loan, you will need to qualify for the HEL. The first you need to do is to check your credit. A good score will likely be approved easily. Check your reports ahead of time so that you can correct any errors. If you uncover any malicious transactions, dispute it right away. Moreover, make sure that you are timely with your payments.

Although your credit is valuable, you can still acquire a home equity loan even if it does not look good. However, your interest rate might be higher than the others. Aside from your credit, the lender will also check other information relating to your finances. He will check your debt-to-income ratio as well. This is valuable to them because this will aid them in assessing your ability to pay the debt.

Most importantly, you need to have equity on the property. Most lenders would require that you have paid at least 20% of the mortgage in order for you to qualify.

Why apply for a home equity loan?

As mentioned earlier, many use this to finance their renovation. However, this form of financing is not only limited to that as there are those who use this to pay for their debts as well as finance their college education. It has lower interest rates too. However, this has pitfalls too. There are a lot of borrowers who use HEL even if they do not need the money. When the loan matures, they fail to make a balloon payment.

HEL has many benefits. However, it has certain drawbacks as well so you have to be wise in using such loan.
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