What is a Home Equity Loan and is it a Good Idea?
What is a home equity loan? Home equity loans allow you to borrow money against the value of your home. Interest fees on this type of loan are lower than for other forms of credit and it has the added benefit of being tax deductible. So, how much money can you borrow?
What is a home equity loan and how does it work in practical terms? If you buy a house for $150 000 and make a down payment of $ 30 000 (20%). To pay the remainder of $ 120 000 you take out a first mortgage. When you close on your home you will have 20% equity. As you pay off the principal amount you get more equity and the value of your home increases.
If you paid $ 12 000 on the principal on a property valued at $ 150 000 at the time of purchase and it is now worth $ 170 000. The equity you had to begin with
($ 30 000) plus the principal ($ 12 000) plus the hike in value ($ 20 000) = $ 62 000 available in equity. You can take out home equity loans for this amount. Hopefully this answers the 'what is a home equity loan?' question!
Now let's move on to some of the benefits and drawback of home loans and answer - what is a home equity loan going to do in my favor? Home equity loans do have some good benefits when compared to other credit options.
What is a home equity loan going to do for you that makes it a worthwhile choice? Usually you will be able to deduct interest on loans up to $100,000 from your taxes. Banks see this type of loan as secure because a home is the collateral. Interest rates are lower than unsecured personal loans and credit cards. You can use home equity loans for paying debts, repairing, or improving your home, medical care, tuition, cars, boats, or holidays.
What is a home equity loan going to give you? - Quite a windfall when you need it most! It can also improve your credit rating if you are responsible about repayments and use it wisely. It will only take about two weeks to get one, that's not bad!
What is a home equity loan going to do for your financial picture that is less desirable? First and foremost you could lose your home if you are delinquent on your repayments. Younger lenders who are liable to lose jobs or make financial mistakes may be more at risk than older, more stable lenders. Your loan is inflation-linked and payments may rise sharply with the financial tide. Not all loans are tax deductible (for example, high loan-to-value loans).
What is a home equity loan going to do to improve your life? A whole lot, if you really need it. Just be sure to be responsible about your repayments and make sure you won't be in for more trouble than just riding it out and saving for the things you want.
