A home equity loan, also referred to as a second mortgage, is a loan for which you borrow a lump sum of money from the bank and use your house as collateral. You have to pay the money back over a designated amount of time and at a specified interest rate. People often take out home equity loans when they want to complete a home renovation project but lack the funds.
The U.S. Congress enacted the Consumer Credit Protection Act, also called the Truth in Lending Act, in 1968. Thanks to the this law, your home equity loan agreement includes all of the important details that relate to your contract, including the terms, the costs, the APR, how payments will be made and whatever other charges are involved in the deal. Another part of the Truth in Lending Act that affects your home equity loan is a three-day window in which you can back out of the agreement once you've opened the account. If you choose to cancel your home equity loan, you have to notify your creditor in writing. He then has to cancel his security interest and give back the application and loan fees you already paid. Even after the three days have passed, if you come to the conclusion that your lender has taken advantage of you, you can report him to the Federal Trade Commission. Since people seeking second mortgages are often in financial straits, the Consumer Credit Protection Act is particularly important in safeguarding their interests against dishonest lenders.
Home equity loans come with fixed interest rates, which is a benefit for people trying to organize their future payment schedule. With a fixed rate, you know exactly what you'll pay each month. Meanwhile, a home equity line of credit typically works with a variable interest rate, which can dip lower or higher each month, depending on the prime rate.