We all know what loans are and how banks function with respect to granting a loan. A home equity loan is different, as your house is mortgaged to the bank. This loan is basically a kind of loan which allows you to borrow money using your house as collateral. It is a lump amount that you pay off within a certain time period, including fixed interest rates and monthly payments. This loan is a type of second mortgage, your first mortgage being the one you use to acquire your house. Let’s take a look at the benefits of these loans and the risks involved.
Benefits of Home Equity Loans
1. They ideally have a low interest rate or APR (Annual Percentage Rate)
2. They are easier to qualify for, in case you are financially unstable
3. Interest rates on home equity loans could be tax-deductible
4. They allow you to borrow a comparatively large amount of money
You can avail these benefits on these loans as they are ‘safe’ loans for banks to grant their customers, considering the loan is secured by your house as collateral. In case you fail to repay the amount, the bank can lay a claim on your house, sell it, and recover the money.
Home Equity Loan Uses
You can use this loan for various purposes. It would be ideal to use it for a purpose with larger benefits as you have used your house as collateral. Common home equity loan uses include:
1. Renovate or remodel your existing house
2. Accumulate fund to invest in another house or land
3. Pay for high school/university/other educational purposes
4. Combine high-interest debts
How To Find The Best Home Equity Loan Options
It is always suggested that you look around before you fix on any particular home equity loan option. What you can do is:
1. Check up with regard to such loans with banks, brokers, credit unions
2. Make sure your financial records and bank statements are up to date (also, make sure they indicate you are financially stable)
3. Compare the pros and cons of home equity loans from various sources
The Risks Involved
The most obvious risk in relation to these loans would be the possibility of you losing your house, in case of which you fail to pay the amount to the bank. Also, there are quite a number of scams by which house owners are tricked out of their property or robbed of money. To avoid either of the two, you should do a thorough background check on the bank you are dealing with and make sure everything is legit.