A home equity loan is a type of loan which allows the borrower to use the equity on their home as collateral. The amount of loan that the borrower can get is usually determined by the value of the property. The lending institution usually determines this value. Compared to other types of loans, a home equity loan offers its borrowers one of the best interest rates around. Suppose you are planning on taking a home equity loan, but you are not sure if you are eligible for it or not, then you are on the right page. Here you will learn about USDA loan eligibility and all things pertaining to getting one.
What are the Benefits of Taking a Home Equity Loan?
If you need to settle large expenses such as home renovation, consolidating debt, tuition fees, or other expenses, getting a home equity loan is a step in the right direction. This is mainly because it is easier to qualify for a home equity loan compared to other loans, plus you will get the loan against what your home is valued at.
Meanwhile, here are some other benefits it has to offer.
Getting a home equity loan may qualify you for a tax deduction on the interest paid for the loan. Especially if the loan was used mainly for renovating the home, this reduces the burden on loan repayment. Before taking up a home equity loan for home renovation, it is advisable to get more information about the process involved by visiting irs.gov or consulting a tax professional.
With a home equity loan, you can use a credit card to access the loan or your check to withdraw the available balance throughout the borrowing period. Also, you have the option of monthly repayments, which could be of varying amounts, depending on the prevailing interest rate or the changes in the outstanding balance.
The interest rates on home equity loans are typically fixed, and they are usually lower than the interest rates of your credit cards and other consumer loans that are unsecured. With home equity loans, the monthly repayment sum remains the same for the duration of the loan. This way, borrowers get to enjoy simplicity in budgeting.
When you go for a home equity loan, the amount you are borrowing is usually paid to you in one lump sum. This gives room for covering large expenses and also saving you a lot of financial stress.
Is it Right to Take a Home Equity Loan?
It is difficult to say if taking a home equity loan is the right decision for you or not without consulting an expert. However, if you have a steady source of income and you are responsible for loan repayments, a home equity loan might be a good option for you. This is because it gives you access to large funds to cover your expenses, and it also provides you with much-needed flexibility.
Risks of a Home Equity Loan
Before you conclude your decision to take a home equity loan, it is only right to consider the risks involved. The fact that taking a home equity loan is tied to your home is enough reason for you to weigh the risks and benefits carefully. Below are some of the risks to consider.
Equity Can Rise And Fall
As time goes by and different economic policies get implemented, your house could lose its value. This loss of value may be a result of the housing crisis, or the house is outdated. In this type of situation, you may end up owing more than the value of your home. The best way to avoid such is to borrow only what you need and not what your home is valued at because you have access to do so.
Your Home is on the Line
One major risk of taking a home equity loan is that you put your home on the line. In the event of defaulting on your loan, you could lose the home. Therefore, before taking a home equity loan, ensure you properly analyze your financial ability to repay the loan.
Your Credit Score Can Drop
There are several factors that affect your credit score, and how much you are using out of your available credit is one of such factors. Adding a considerable sum from your home equity loan can affect your credit report negatively.
Many see home equity loans as available funds waiting to be borrowed or used. However, no matter how easy it is to get or the benefits it offers, it is still a loan and needs to be repaid with interest. So before opting for a home equity loan, ensure you’ve explored all other options, and most importantly, consult a loan expert.