Home Equity Pros and Cons

Home Equity Pros and Cons

Despite the name, a home equity line of credit can be used to purchase anything you like and doesn’t have to be spent on the home.

For many with a poor credit report a home equity loan is the better option. Interest rates on other loans will be exceptionally high because of a poor credit history where as a home equity loan will be much lower.

The lower interest rate comes at a price though of course because you are putting up your home as security. Fail to pay back the loan and you could be facing a foreclosure notice.

For this reason home equity loans are not to be taken lightly. If you find you are in a lot of debt with several loans and credit card payments all going out each month, it makes sense to consolidate all those loans into one because you will be paying far less in interest charges.

Another nice bonus to a home equity loan is that the interest is tax deductable as long as you use the long form to file your taxes.

Add up your current outgoings in loan repayments, credit card debt etc. and get a few quotes for a home equity loan to see how much you would be saving. You then have to give serious thought to deciding if that monthly saving is worth the risk of losing your home should you fall on harf times before clawing back some of the equity in your home. The way house prices are going at present, that could take a seriously long time.

Appreciating the concept of what a home equity loan is may be the most determining factor in choosing this type of loan. A simple definition of equity is the monetary value of your home and property minus any amount still owed. This includes an existing mortgage, liens, or any type of financial claim on the house or property. Equity, therefore, is the monetary value of your house that has been paid off.

To use that principle, lets plug in a couple of numbers. If your house is worth $200,000, and you still owe $80,000 on the mortgage, your equity is $120,000. You may apply for and receive a home equity loan up to and including the full value of $120,000 if your credit rating is good. While that may give you some necessary and ready cash, you must also access your ability to pay off this loan.

To further comprehend what a home equity loan is, its advisable to sit down with a broker and discuss all the aspects associated with this type of loan agreement. Every mortgage lending company will have their own set of rules about the limit of money they will be willing to give you, as well as any service fees or payments schedules that will be included in your contract.

As you gain more understanding about what a home equity loan is, you will be in a better position to accept or reject an offer from a financial institution. At its most basic level, a home equity loan is an amount of money, usually paid in a lump sum. The amount of money you may borrow is directly dependent on the amount of money you have paid off on your home and property. However, you need to repay this money to the lending company, which is why you need to weigh your ability to pay with the urgency of your loan application. Are you using this money to pay for college? Consolidate credit card debts? Or maybe you are planning on a home improvement project? Whatever your reason, you need to decide on comfortable monthly payments and then make that amount known to the lending institution. What is a home equity loan? It can be a lifesaver to a homeowner who is struggling with personal debt or it can be the cause of more financial stress. The difference between these two options will be determined by the borrower after fully assessing the many types and conditions of these loan agreements.