Previously, in Part 1 of the “How to Save Your House from Foreclosure – The Equity in Your Home” series, we explained how to take advantage of your home equity and use it to bring any outstanding mortgage loan balances up to date and prevent foreclosure.
In today’s post, we’ll focus on the two types of home equity loans- open-ended and close-ended. So, let’s dive into it!
Also known as a “close-ended” loan or a “second mortgage”, this type of home equity loan is provided in a lump-sum. Once the borrower has been provided the whole amount of the loan, he or she will start to repay it on a monthly basis. The payments have a flat or fixed interest rate for a certain period of time.
Example: Your home equity value is $50,000; the maximum loan amount will be the same which will be given to you in a lump-sum.
Many borrowers choose to use this type of loan for home repairs, consolidating bills, or even update their first mortgage outstanding loan payments in order to avoid foreclosure.
Another type of home equity loan is also known as the “open-ended” loan, also referred to as the Home Equity Lines of Credit (HELOC).
This type of loan allows you flexibility on how much you can pull out from your credit line during the loan period. This works like a credit card having funds ready for you to withdraw any amount at any time you would need it. As it functions like a credit card, the borrower will need to pay what is owed on a monthly basis, then they can borrow or pull more money again for their another set of specific needs.
After the loan period, withdrawals end as the time comes when the borrower will begin paying off the debt with variable interest rate on certain period of time.
Example: Your home equity value is $50,000, then you have that total amount readily available for you to pull out when you need it. The borrower has an option to get only the amount needed during the loan period, like for a 7 or more years of loan period as for an example.
Monthly payments work like that of a credit card except that the withdrawals are valid only for the duration of the loan contract period.
Talk to you soon!