Home equity loans are established to allow you to borrow against your home value. These loans suit people who need to borrow relatively large amounts of cash. They are easier to qualify for than any other forms of loans (since their house secures them).
A home equity loan can offer funds for anything you need if the value of your home is more than you owe towards it. It is basically a second mortgage. Your “first” mortgage is considered the one you used to buy your home. Nonetheless, you can add some other loans to borrow against the asset if you’ve built up sufficient equity.
Benefits of Home Equity Loans
These loans are attractive to both lenders and borrowers. Here are a few of the major benefits for the borrowers:
- Borrowers can qualify for a large sum of cash.
- They can be easier to qualify for if you have bad credit (sometimes).
- Home equity loans usually have low-interest rates (or APR).
- Interest rates on a home equity loan may be tax deductible.
Many of those benefits (apart from tax deduction) are available since home equity loans are usually safe loans for the banks to make: your home is fully secured as collateral against the loan. If you don’t repay the loan, the bank can repossess your house, and sell it to recover any unpaid money.
Additionally, borrowers seem to prioritize home equity loans over other loans since they do not want to lose their properties (faced with a choice of missing a credit card payment or a mortgage payment, you might neglect the card payment).
Of course, financial institutions must be careful not to lend excessively (as they did before the housing crisis) or they risk significant losses. To protect themselves, lenders always try to make sure that you do not borrow more than 85 percent or so of your home’s value – considering your original mortgage purpose and any home equity loan you are applying for.
A portion of your home’s value is available and referred to as the loan to value ratio, and may differ from one bank to another.
Logistics
You can secure a pretty big sum of money when you take out a home equity loan, and you must repay it over a specified time. Your interest rate is set up-front, and each payment lowers your loan balance and covers a number of your interest costs (it’s an amortizing loan).
If you do not need all of the cash at once, you can also consider a home equity line of credit (HELOC). This option offers a pool of money which you can draw from if and when you require it, and you only pay interest on any cash which you have actually borrowed. Nonetheless, be aware that banks can cancel or close an HELOC before you have had an opportunity to use the money, and the interest rate on an HELOC usually changes over time.
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Common Uses Of Home Equity Loans
You can utilize a home equity loan for anything you need. However, they are often used for some of life’s bigger expenses since homes tend to have a great value to borrow against.
For instance, you may find that a large number of borrowers want to:
- Consolidate high-interest debts.
- Pay for the college education of a family member.
- Renovate, remodel, or otherwise improve the property and house.
- Fund the purchase of a second home.
Drawbacks of Home Equity Loans
Before taking out a home equity loan, you should be wary of all risks involved with these loans. The biggest issue is that you’ll lose your home if you don’t meet the payment schedule required by the loan.
Since these loans can offer a lot of cash, it is tempting to use your property as an ATM. Ensure to use the equity of your home only for the very important costs; things which will boost the value of your income or your home are good examples.
Another common drawback of home equity loans is that many scammers have found numerous ways to deceive homeowners out of their most valuable property (or at least get a high amount of money out of the deal).
Ensure that you know who you are doing business with. If something smells fishy (like a reluctance to put things in writing or a high-pressure sales pitch), then take a step back and check if the deal is legitimate.
How to Find the Best Home Equity Loans
To get the best home equity loan, it is highly recommended that you:
- Compare your offers to those found on advertisements and websites.
- Shop around. Try a variety of sources (brokers, banks, and the credit unions).
- Ask your network of family and friends who they might recommend.
- Manage your credit score and ensure your credit reports are accurate.
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