A home equity loan allows you to borrow against the value of your home. This loan permits people to borrow relatively larger amounts of money. Compared to the other types of loans, qualifying for a home equity loan is very easy. If you borrow an amount lower than the value of your property, home equity loan can provide you funds for anything you want. This is a type of loan that allows you to use the equity of your home as collateral. These types of loans are used for financing major expenses such as college education, medical bills or home repair. Therefore it is also known as second mortgage. First mortgage is used for purchasing a home.
Home Equity Loan Benefits
A home equity loan is attractive for borrowers as well as lenders. Here are a few benefits.
* Lower interest rate
* Easier to qualify
* You may get it even if you have a bad credit
* Interest cost may be tax deductible
* It allows you to apply for relatively larger loans
Generally, the home equity loans are safe for banks. Therefore, you will get all the benefits except tax deduction. The bank is giving you a loan by taking your home as collateral. So, the bank can take your property and sell it if you fail to repay the loan. Thus the bank can recover the unpaid money. Borrowers also give priority to these loans because they do not like to lose their homes.
Though risk free, banks should be careful to lend an amount, which is higher than the price of home. Usually, banks lend 85% of the value as home equity loan. Percentage of the value available for your home is known as loan to value ratio. It may vary from one bank to the other.
Once you borrowed money from a bank, it should be repaid with fixed monthly payments. Your loan balance will be reduced each payment and it covers some interest costs. A HELOC (home equity line of credit) is also possible if you do not want to take all of the money at once. This option allows you to withdraw a pool of money when you need. But, you should pay interest for the actual amount you have borrowed. However, the bank can cancel or close this facility before you use the money. The rate of interest on a HELOC also changes over time.
Usage of Home Equity Loans
Home equity loans can be used for any purpose, however, usually it is taken for meeting larger expenses in life, which include:
* Renovate, remodel or improve property or house
* Consolidate debts with high interest
* Meet the college education of family members
* Fund for the purchase of a second home
You can save thousands of dollars if you select the best home equity loan. Before selecting a bank, you must do an extensive research. You can also ask to your friends and family. Before borrowing, you must ensure that you really need this type of loan. You must also think whethre the home equity loan is better than an unsecured loan or a simple credit card account. You must also prepare a detailed plan regarding your income and expenses. You need to repay larger amounts for larger loans. So, all factors must be considered carefully before borrowing a home equity loan.