Looking at the way the home equity loans have become popular one cannot deny the fact that they offer a great means to easy and affordable money.
The loan which allows homeowners to borrow money by making maximum use of their home is known as home-equity loan or a second mortgage. The popularity of home-equity loan rose in 1996 as the new regulations allowed consumers to save a lot of money in the form of tax deductions on the interest part of the purchases made by them.
The borrowed money with a home equity loan can be as high as $300,000 and still while filing tax returns, all of the interest will be deducted. The working process of home equity loans including their advantages and disadvantages has been explained below.
With the lending space getting hot and the lenders coming up with different rules which are more towards safeguarding those getting loans isn’t any easy these days. One would require a good to excellent credit score, hefty income and a lot of other things including the possession of assets to be able to get a loan approved for themselves. In the wake of the recent economic crisis a lot of people have suffered and it clearly shows on their plummeting credit ratings. Getting a loan itself is difficult. With consolidation requests flooding the gates of the lenders they are more skeptical about making any decision easily at www.financialbusinessguide.com.
In such a scenario if you are looking for a hefty amount as a loan you are left with one simple option and that is to keep your home as collateral and en-cash the equity you have earned on it over the years. This will offer you an easy approval and an interest rate which is otherwise impossible to get.
Know more about the Home-Equity Loans
There are mainly two types of home equity loans namely- fixed-rate loans and lines of credit. The time period for both loans is between five to fifteen years. These both loans should be repaid in full in case selling of home used as equity takes place.
To put it simply a lot of people do not want any surprises with the amount of money they would be required to pay on a monthly basis towards these loans. In order to do so, they would take on a fixed rate loan. As the name suggests these loans come with a fixed rate of interest on them and the amount of money you are required to pay against the loan remain fixed throughout the term of the loan. It offers a great scope to borrowers to plan their finances ahead at Financial Business Guide.
Understanding Lines of Credit
A home-equity line of credit (HELOC) work same as a credit card and in some cases comes bundled with a credit card. This type of loan is also known as variable-rate loan. In this type of loan, there is a fixed spending limit. Borrowers can withdraw money according to their needs as this is a variable-rate loan. This withdrawal can be done via a credit cards or special cheques. Monthly payment is decided on the basis of how much money is borrowed and present interest rate. This type of loan also has a fixed time period. Full repayment of outstanding amount must be made at end of the term.
Benefits enjoyed by consumers
An easy source of cash is provided by home equity loans. Credit cards and consumer loans have much higher interest rate than home equity loans. So in terms of low interest rate payments home equity loans come second after first mortgage. The most common reason for borrowing money against equity is to settle credit card inconsistencies or balance. Its additional benefit is tax deductibility. So consumers get a single payment, low interest rate and tax relief if they choose to settle a debt via home equity loan.
Benefits enjoyed by creditor lenders are most benefited by lending money by a home-equity loan as they not only earn on the borrower’s initial mortgage via interest and fee charges but also earn more interest and fee on second mortgage. In addition to this, if a borrower becomes defaulter, they not only keep all the money earned on initial and second mortgage but also get to repossess the property. They can sell this property and restart this process with another consumer.
How to use a home equity loan
Serious borrowers can make good use of home equity loans. Home equity loans can be a viable alternative if one has a regular and stable income as they offer tax deductibility and low interest rate. But one has to be sure that he is capable of making the repayment otherwise it will create a huge debt and borrower could lose his property. Fixed rate loans and home equity lines of credit serve for different purposes. Fixed rate home equity is mainly apt for a large single purchase such as renovation of house or unexpected bills. Whereas home equity lines of credit is apt for short term recurring payments such as tuition fee or college fee.
The major disadvantage associated with home equity loan is that the borrower uses it for re-loaning. With easy money available by means of home equity loans people are seen getting into a perpetual cycle of lending. They would not like to come out of it as this might require them to bring about changes in their lifestyle. So, home equity loan becomes a tool for paying off existing debt and using it for making additional purchases.
The borrower can borrow money to about 125% of net worth of property. So as the borrowed money is more than cost of property, this type of loan usually has high fees. In addition to this, no tax deduction is offered on the portion of loan above home value.
So before taking a loan which worth more than the property, one should some thinking such as was it difficult to live while owing only 100% of the value of home. If the answer is yes, what difference taking 25% extra debt will make including interest and other fees. This could lead to a possible bankruptcy.
Fixed rate equity loans are generally borrowed for financing home improvement or renovation. Some renovations made might add to the value of home such as remodeling kitchen or bathroom while other may look worthy to the owner but may not prove valuable during resale of the home such as a swimming pool. So, one should make the required estimate whether the improvements add enough value to cover the costs.
Some home equity loans such as home equity lines of credit are generally borrowed for paying child’s college education. If the borrower has reached his retirement or reaching a retirement, he should take into consideration that what will be the effect of the loan on his financial condition. Generally for near retirement borrowers it is advisable to consider other alternatives than home equity.
Out of life’s essential necessities like food clothing and shelter, only shelter can be utilised for borrowing money. So, one can be easily tempted to use home equity for spending extravagantly on expensive luxuries knowing the fact that it involves major risk of losing the property. So before borrowing this type of loan, one should have enough knowledge not only of his current financial condition but also of his ability to repay the loan including interest and fee.