Home Equity 101

A home equity loan is a loan in which your house is used as collateral to secure a personal loan. You might obtain a loan if you need to make home improvements or if emergency expenses come up, and some people use home equity loans to consolidate debt or pay off credit cards. There are many other types of loans such as business loans that we won’t go into detail about on this report. In some cases, you can obtain a low interest rate, so this can save you money by paying off any higher interest rate debt such as credit cards.

How Home Equity Loans Work

Because a home equity loan is secured by the value of your house, they can be easier to obtain than other loans. However, if you do not make payments on the loan, the lender can take your home. In most cases, lenders will not permit you to borrow more than 85% of what your home is worth. Bankrate.com includes a home equity calculator to calculate the payment amount and interest rate. If you are approved for a home equity loan, you will receive cash or check for the amount of the loan and then make monthly payments to pay down the loan amount, plus interest.

Advantages of Home Equity Loans

A home equity loan has numerous benefits. Some of these advantages include:

  • Low interest rates: If you have a significant amount of credit card and other debt, a home equity loan could help you erase those debts, and they will provide a loan with a lower rate, so you will save money.
  • Tax Implications: You could qualify for a tax deduction.
  • Lump sum of money: You could pay for medical bills, home improvements, car expenses, or anything else you need.

Common Uses for a Home Equity Loan

  • Debt Consolidation
  • Home Improvements
  • Medical Bills
  • College Tuition
  • Major Purchase (car, boat, RV)
  • Refinancing an existing mortgage

Risks of Home Equity Loans

The main disadvantage of a home equity loan is that you could lose your home if you do not pay back the amount borrowed. Because the consequences are so high, this should be a loan reserved only for important reasons, not just to get money. In addition, a reputable lender with fair rates is key. If the value of your home decreases, you may owe more money than it is worth, so ensuring that your property valuation is up-to-date is important. In addition, a home equity loan is not a great avenue for those looking to sell their house. Since the loan is based on your property, selling your house while paying off a home equity loan could cause major headaches.

How to Search for the Best Home Equity Loans

There are a few tips that you need to consider when looking for a home equity loan. Some of the things you need to consider include:

  • Your credit score: If you have a low score, you will probably not qualify for a loan. Know your score before you apply for a loan.
  • Your lender: These loans are offered by credit unions, banks, and online lenders. You should search all lenders to find a reliable lender with reasonable rates for your loan.
  • The interest rate: Compare lenders to see who will offer you the lowest interest rate.
  • Your payments: You want to make sure you have a payment that you can afford, as you definitely do not want to find yourself unable to keep up with your payments.
  • Consider insurance: If you should lose your job or suffer a medical emergency, insurance can help prevent you from defaulting on your loan and losing your home.
  • Closing Cost: You could pay up to 6% of the cost of the loan in closing costs, so you need to make sure it is worth it.

The Bottom Line

A home equity loan has numerous benefits and can really help you in certain situations. If you need some financial help and have the equity available in your home, these loans can help you obtain your goals and decrease your debt level. Another option we didn’t have time to get into is reverse mortgages, if you get a reverse mortgage you will essentially be selling your house to the bank. If you’re looking for extra guidance, The Simple Dollar, a website dedicated to educating consumers about financial matters, recently compiled an overview of the home equity loan process. Their resource includes a step-by-step breakdown of the steps to finding a home equity loan and includes helpful tips for anyone looking to learn more about the loan process.

Jesse Fin

Jesse worked as a journalist for a large tv station in Korea in her past life. She now works full time at home as a blogger and loves to help her friends manage their personal budgets.

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