Learning the Basics of Home Equity Loans


Having untapped equity in your home is more or less like throwing away perfectly good money. Although personal loans are becoming increasingly more popular due to how easy they make it for individuals with a good credit score to borrow money, there are better ways to get funds.

One of them is home equity loans. These transactions are considerably more personal than others, mainly due to the fact that you are required to offer the equity in your home as collateral for the loan.

Unfortunately, there is a lot of debate about whether or not the benefits outweigh the risks, however, home equity loans are a financial option that should never be ignored. The amount of money that you can get from these is enough to do anything from home improvements to purchasing assets that will serve to further increase the value in your house.

What is a home equity loan?

More commonly known as the second mortgage, a home equity loan is a loan that you can take out with a bank or mortgage. This having been said, it is important to keep in mind the fact that it does not replace your current mortgage.

Furthermore, a home equity loan is a secured transaction which means that you must offer collateral in order to apply for it. As its name implies, the collateral is formed from the equity that you have in your home. This having been said, a home equity loan is often easier to access than others, however, it carries more risk, in the sense that the bank will be able to take possession of your home if you fail to repay the money.

It is also possible to apply for a HELOC, or a home equity line of credit, which also uses the equity in your home as collateral. The main difference between the two is the fact that the loan has a fixed status, which means that you borrow a set amount of money that you must repay over the course of a specified number of months, with interest.

On the other hand, a HELOC simply sets a limit to how much you can borrow and lets you take out how much money you need, whenever you want. In most cases, there are no serious penalties for HELOCS, unless you fail to return all of the money that you’ve borrowed, at the end of the agreement. Generally speaking, HELOCS are very similar to credit cards in terms of how they work, with the main difference being that they have considerably larger credit limits.

The more or less obvious advantages of a home equity loan

Returning to actual equity loans, these are in many ways better than other ways to secure funds. They offer the same flexibility that personal loans do, but they come with better interest rates and terms and conditions. It is also worth mentioning that most lenders will let you choose whether you want to pay fixed or variable interest.

From a functional point of view, the fact that they can be taken out for periods between 15-20 years makes it great for debt consolidation or for long-term costly home improvement projects or other expensive purchases.

Pretty much all lenders will prefer that you repay the money that you borrow instead of having them taking possession of your property. As a result, they offer a lot of flexibility when it comes to terms and conditions and also try to work with the borrowers to find affordable interest rates and decent repayment timeframes.

How a home equity loan can put you in a difficult financial position?

The greatest risk is also the most obvious. The fact that you essentially guarantee the loan with your home means that if anything happens, the lender will be able to seize your property. While no bank will ever prefer to take your house instead of getting the loan money back, failure to make the payments may lead to you losing your home.

Furthermore, the fact that home equity loans are long-term financial commitments means that a lot can happen, especially if you are making large monthly payments for your house. Any change in income can be dangerous and becoming unemployed for an extended period of time can be disastrous.

The risks can be even greater if you chose to pay variable interest, especially if the economy is unstable.

Conclusion

Home equity loans are extremely useful if you need a very large amount of money that you can pay over the course of one or two decades, however, it does come with inherent risks. In most cases, if you do all the math beforehand and plan your expenses, at least to some degree, you should be able to repay the money without actually feeling it.