What are Home Equity Loans, There Advantages and Disadvantages
Home equity loans which are also known as a second mortgage, allows you to borrow against the value of your home. These loans appeal to borrowers who find that they can borrow relatively large amount of money because these loans are easier to qualify. Generally home equity loans come in two varieties, fixed rate loans and line of credit. Both the loans are available with the terms which range from 5 to 15 years and other major similarity between the two is that both the types of loans must be repaid in full if the home on which they borrow their loan is sold.
So before going for this type of loan consider things like fixed rate loan suits your needs, how much you want to borrow and over what period of time, whether you are able to make the payments to maintain your credit ratings to put your home at risk etc. So if you go for any type of loan always borrow the amount that you can comfortably afford without losing your peace of mind.
Major advantages of home equity loans
Low interest rate: One of the major advantage of home equity lump-sum loan or home equity line of credit is their lower interest rates. These interest rates are far lower than the typical interest rates charged by the credit card companies. So it attracts both lenders as well as borrowers.
Flexibility: It offer the borrowers great flexibility in how they spend their money. Some home owners use it as a form of financial protection or in case of emergencies. They have to make payments on their home equity lines of credit only when they use it, just like a typical credit card.
Stability: Other major benefit of home equity loans is their stability because they come with a fixed interest rate, one that never changes over the life of a loan. They simply have to make their monthly payments on time to pay it back.
Avail tax deductions:Interest costs on a home equity loans may be tax deductible which is one of its major benefits and makes it more attractive for borrowers.
Comparatively safe: Most of the benefits of home equity loans are because they are generally safe loans for banks to make as the loan is secured by your house as collateral and if you fail to repay, banks will take your property, sell it and recover its unpaid funds.
Disadvantages of home equity loans:
Beware of your expanses: Because these loans provides you a lot of cash, it doesn't mean that you can use it on your luxuries. Use it your home's equity only for the most important expenses to for luxurious vacations or buying a Ferrari. but use it only to improve the value of your home.
Early pay off can be costly: Home equity loans have fixed interest rates and your monthly payments won't rise so check the pre-payment penalty,what you have to pay to the lender if you sell your house or just want to get rid of the monthly payments.
Beware your home is at stake:Some lenders don't act in your best interest and they have found plenty of ways to cheat you so be cautious. If something smells fishy then take a step back and make sure the deal is legitimate.
Tips for Getting the Best Home Equity Loans
As housing markets are continue to improve and thus home equity loans and lines of credit are now becoming a source of extra income for homeowners and thus attracting a large number of people towards it. Home equity loans allow you to borrow against the value of your home because they are easier to qualify and if your home is worth more than you owe on it, then these loans can provide you handsome amount of money that you are expecting. But remember that borrowing against your home put it at great risk of foreclosure if you can't pay the bill.
Qualifying for a home equity loan and getting the best rate depend on several factors including your home's current value and your credit score. To improve your credit score, avoid making late payments, and pay off your credit cards.
Here we provide you few tips that help you to get the best deal home equity loans and be aware of certain issues as well.
- Go to credit unions as they offer better home equity rates than banks and lenders. If credit union doesn't work for you be patient and shop around your local banks as well to get low interest rate home equity loans.
- Before signing a home equity loan, contact multiple lenders and rely on friends referrals. Comparison shopping is one of the best methods of protecting yourself of paying higher interests. So be patient and take your time when buying home equity loans.
- Fluctuating interest rates, payment of advances and balloon payments terms can make home equity lines of credit trickier than typical home loans. So go through its terms and conditions before signing any commitment.
- Before you sign, read the loan closing papers carefully and if you won't find them as you expected or wanted just don't sign. You have the right to cancel the deal for any reason without paying any penalty without three days after signing the loan paper.
- Check whether your lending institution protects you against rising interest rates. As the home equity loans carry variable interest rates which usually range one to three percent above the bank's prime rate. The lending institutions which offer home equity loans must set a maximum interest rate or cap for the life of the loan. It is set by the lender but check that it must be disclosed for all loan agreements before signing it.
- Be sure that all of the interest you hope to finally deduct on your home equity loan is deductible
- You have borrowed a large amount of money on your home equity loan but consider few facts like how you deal with the future unexpected financial events, or a sudden financial instability. Be cautious that sometimes heavily indebted homeowners could find themselves defaulting on their loans and by the end they have to lose their home. Always remember that your home is at stake. So try to have a contingency plan.
- Before indulging any home equity loans check the laws in your state because the laws applied to these loans vary from state to state and are constantly changing.
How to Use Your Home Equity to Your Advantage?
Once you have purchased a home and are making monthly payments, you are in the process of building equity. The opportunity to use the equity you have built up in your home is one of the benefits of home ownership. A "cash-out refinancing" can be a good idea for homeowners who want to draw on the equity built up in their house to get cash for a major purchase or for their children's education.
However cash out refinancing is more advantageous when the item that was purchased has a similar expected life as the loan. Making improvements to your property or purchasing a second home are examples. Since the interest on a mortgage is low, borrowing money against your home proves to be very sound. Besides the mortgage interest is usually tax deductible. (Check with your taxing authority!)
Another possibility to use the equity to your advantage is home equity lines. Many lenders offers home equity lines for homeowners and allow them to draw cash advances with their credit card or write checks up to certain credit limit. Before using a home equity loan or home equity credit line for any purpose, you should be aware of the pitfalls of these loans. The main thing is that you can lose your home if you fail to meet the payment schedule required by the loan. Therefore you need to consider it carefully before do a cash-out with your equity.
There are a few advantages to refinancing a house with an equity line. The first is flexible payments. Unlike fix term mortgages that have fixed monthly payments, an equity line allows you to pay as little as interest only to as much as paying the entire thing off, all without penalty. Another advantage of the equity line is once you start paying it down; the amount you pay off is available to you to draw on again. So if you pay off $50,000 on the line of credit, you will have $50,000 of available credit to use for whatever purpose you want.
The disadvantage of an equity line of credit is the same as the advantage - once you start paying it down; the amount you pay off is available to you to draw on again. For some people, this availability is just too tempting. However, if you keep drawing from it, you'll never pay it off. Remember my post about the credit card trap? Well you don't want to be in a line of credit trap! If you don't think you're discipline enough to be able to control yourself when it comes to financial matters, then an equity line of credit, or any line of credit, is not for you.