home equity loan information

How a home equity loan works

A home loan is made up of principal and interest. Principal is the amount you borrow. Interest is what you pay to borrow the money. At the start of the loan, your repayments largely consist of interest, with a small amount going towards the principal. As you reduce the principal, your interest charges fall until eventually the loan is paid off.

What's in it for the lender

Home loan lending is the core activity of many banks and financial institutions. They make their money from:

Interest on the loan
Loan establishment fees
Ongoing fees and charges

These charges reflect the cost of money as set by the Reserve Bank, the risk associated with the home loan, the cost of administering it and the need for all businesses to make a reasonable profit.

Is a home equity credit line for you?

If you need to borrow money, home equity lines may be one useful source of credit. Initially at least, they may provide you with large amounts of cash at relatively low interest rates. And they may provide you with certain tax advantages unavailable with other kinds of loans. (Check with your tax adviser for details.)

At the same time, home equity lines of credit require you to use your home as collateral for the loan. This may put your home at risk if you are late or cannot make your monthly payments. Those loans with a large final (balloon) payment may lead you to borrow more money to pay off this debt, or they may put your home in jeopardy if you cannot qualify for refinancing. And, if you sell your home, most plans require you to pay off your credit line at that time. In addition, because home equity loans give you relatively easy access to cash, you might find you borrow money more freely.

Home Equity Loan Information