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The idea of getting a home equity loan while interest rates are low to help you pay off your bills, buy a car, or even pay for your child’s education may seem like a great idea. However, you should educate yourself first so you know exactly what a home equity loan is and if it is really right for you.

The closed end home equtiy loan is like a traditional loan, and is commonly called a “second mortgage”. With the closed end home equity loan, the borrower recieves the full loan amount at the time of the loan’s closing. The loan is then to be paid back by the borrower in monthly payments. The monthly payments are fixed, and the loan has to be paid in full during a specific period of time, usually 10-15 years.

An open end home equity loan is a lot more flexible compared to a closed end home equity loan. But instead of getting a lump-sum amount like the closed end loan, the borrower gets a line of credit. With an open end home equity loan, the borrower can choose how much money to borrow against the home’s equity. The borrower can also choose when to borrow the money. Open end home equity loans usually have a variable interest rate.

However, you might be reading this and actually interested in a home equity loan, but have no idea what equity is or if you have any. Equity is how much of your home you have paid for. So, you take the home’s current value and subtract it from the amount you still owe, and that is how much equity you have in your home and what will ultimately be used to approve or deny your home equity loan application. For example, your home is currently worth $400,000 and you have $280,000 left to pay on your mortgage. Your current equity is $120,000.

They may lend you a loan that you can’t possiblly afford. It is important to pick a reputable lender by doing your research. Just because a lender has the lowest closing costs does not make that lender the best choice.