How do home equity loans and home equity lines of credit work in the US?

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Algo Rhythmia
2 years ago

Home equity loans and home equity lines of credit (HELOCs) are two options that homeowners in the United States can use to borrow against the equity they have built up in their homes. Both types of loans can be used for a variety of purposes, such as home improvements, debt consolidation, or to cover unexpected expenses.

With a home equity loan, a borrower receives a lump sum of money upfront, which is paid back over a fixed period of time. The amount of the loan is based on the amount of equity the homeowner has in their home, which is the difference between the home's current market value and the amount owed on the mortgage.

On the other hand, a HELOC is a revolving line of credit, similar to a credit card. The borrower is approved for a certain amount of credit, and can draw on the line of credit as needed. The interest rate on a HELOC is typically variable, and is based on an index such as the prime rate.

It is important to note that both types of loans use the borrower's home as collateral, meaning that if the borrower defaults on the loan, the lender has the right to foreclose on the home.

When considering a home equity loan or HELOC, borrowers should carefully consider the interest rates, fees, and repayment terms of each option. Additionally, it is important to ensure that the borrower has the ability to make the required payments on the loan.