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Owning a home is one of the greatest assets you can possess in your life. It is very common that most homes appreciate in property value over a period of time. In fact, in most cases, the value of a home goes up to that of the value when you purchased it and this is the increase in home equity. Use your home equity (difference between a home value and the amount you owe on it) as the collateral and get a home equity loan to fulfill your financial needs.
1.Closed-end Home equity loan / Standard Home Equity Loan
2.Home equity line of credit (HELOC)
Closed-end Home Equity Loan is also known as standard home equity loan or second mortgage loan. With this option, the borrower gets a lump sum at a fixed rate and has to make monthly payments for the remaining loan term. A closed-end loan enables steady repayments since the rate is fixed.
A Home Equity Line of Credit (HELOC) is a revolving credit loan and works just as other line of credit. Here, the lender consents to give you maximum money for an agreed term using the home equity as collateral. You are eligible to borrow money from your account up to the preset amount according to your wish. You need to pay interest only to for the exact amount you have borrowed. As HELOC is a revolving credit loan, you can borrow money, repay that amount, and again borrow money further. Usually, money in a HELOC can be accessed with checks and credit cards issued for this purpose. The rates in HELOC are generally variable but you can deal for fixed rates also.
1. Interest rates are lower when compared to other loan types.
2. Easy to qualify even if you have a bad credit history as your home guarantees the repayments.
3. In most cases, interest payments on these loans are tax deductible.
4. Chances are high for the borrowers to get large amount loans.
5. You can take up home improvement or repairs.
6. Use the money to purchase new or used vehicles.
7. Pay the fees for educational expenses.
8. You can clear your medical bills
9. Spend some money for familial expenditure or for your vacation.
10. You will get an opportunity to invest for big ventures.
1. As the Home Equity Loan is secured by your home, you must be careful about repayments or else your may lose the home.
2. Another drawback is that the loan amount is dependent on the equity available in your home.
3. You are borrowing money from your home's equity, which means your reduced ownership in your home.
4. Most Home Equity Loans have variable interest rates, and so, the interest rates may go up due to changes in the economy. This leads to the possibility of fluctuations in interest rates. So, you should make sure of the cap on your loans interest rate beforehand.
Generally, lenders will allow you to borrow from your home equity till you reach the loan-to-value (LTV is the ratio of the amount of your loan to the value of the home) ratio of 80%. You can calculate the loan-to-value ratio by dividing the total money you borrowed with the total value of your home.
Finally, shop around to get the best deal for you. Decide whether you want a Home Equity Loan or a HELOC. Pick the best offer that suits your requirement and close the deal carefully. Make sure that you get the best offer you were assured. Read all the loan papers before you sign.
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