Understanding the concept of a home equity loan
A home equity loan is like a line of credit that allows you to borrow money, using your home's equity as collateral. The collateral is property that you pledge as a guarantee that you will repay a debt. If you don't repay the debt, the lender can take your collateral and sell it to get its money back. With a home equity loan, you pledge the equity of your home as collateral. Equity implies the difference between the worth of your home and the debt you owe in mortgage (or mortgages in case there are many of them)
What is an interest only loan?
An interest-only loan has a flexible structure that allows you to pay only the interest or the interest and as much of principal as you want., during an initial period of time. There are various
interest only home equity loans available, which include
- 30-year fixed-rate mortgages
- Adjustable-rate mortgages.
- Shorter period (Three, five, or seven years) of interest only option
Reasons to consider an interest only home equity loan
1. Your monthly payment will be lower than it would be with an interest and principal payment.
2. Your interest rate may or may not be lower than a traditional mortgage, but you will have the option of flexible payments.
3. Interest-only loans allow you to control your payment amount and your cash flow in any given month during the interest only period.
4. If you expect to live in your current home for less than ten years, then an interest only loan is a good option.
5. Some interest only home equity loans offer you a "draw" period of up to 15 years, which is followed by a repayment period of up to 15 years.
This is a revolving loan, which means that, during the draw period, you may make advances, repay the advances, and advance the line of credit again.
6. An equity loan may reduce your tax liability (consult a tax advisor), reduce your interest payments on other high-interest debt, and pay for college tuition, home improvements, and other major purchases.
7. A common misconception is that if you're not paying down your loan's principal, you're not building equity in your home. Not necessarily true. Homes in the U.S. have been appreciating between 5 and 6% a year. Chances are that even if you're not paying down your principal, you're building equity in your home through appreciation.
