How does a Home Equity loan works and why go for it?
Understanding the Home Equity Loan
Considering the volatile property markets, as the home rises in value and the mortgage on the home is paid, the investors end up building substantial equity in it. Home Equity Loan is a unique financial tool that allows you to borrow money against the value accumulated in your existing home. It is a type of mortgage where you borrow money against the home equity you built on your already mortgaged house.
Why avail the Home Equity Loan option?
Although it is always good to have some equity built over a period of time, the other side of the coin is the extra cash trapped away in the home equity which could be otherwise used to fulfill other essential financial goals such as paying off debts, retirement planning, home renovation etc.
Home Equity loan is especially beneficial for someone who wishes to borrow a large sum of money for specific financial needs. Furthermore, it is easier to qualify for the Home Equity loan as compared to the other types of loans due to the fact that they are secured by the house of the borrower. home equity you built on your already mortgaged house.
How does a Home Equity Loan work?
The borrowers who wish to take the advantage of the Home Equity Loan typically enjoys two options to avail funds
The first option with the Home Equity Loan borrowers’ is to take lump-sum cash against the home equity and opt for repaying the loan over time with fixed installments every month
The other option that the borrowers have is to get approved for a maximum amount available as the home equity loan and borrow only what is needed at a time. This is also known as a home equity line of credit (HELOC). The benefit of this option is that it allows you to borrow money multiple times depending on how much amount you borrow each time
Example of the Home Equity Loan
Reverse Mortgage is a type of home equity loan that is extremely beneficial to the seasoned investors who have accumulated enough home equity and want to use this to supplement their retirement income and other financial goals.
A reverse mortgage also called the home equity conversion mortgage (HECM) in the United States is a unique financial tool for the property investors or homeowners.
It is a financial instrument designed largely for the retirees aged 62 years or above and is an excellent way that allows the senior citizens to achieve their financial goals. A home equity conversion mortgage, or HECM, is Federal Housing Administration’s reverse mortgage loan program for the retirees in the US. The program enables the seniors to withdraw some of the equity in their home in place of immediate need of the cash. –
Benefits of Home Equity Loan
Among the major benefits of the Home Equity Loans are-
The most attractive benefit of the Home equity loans is the much lower interest rates on them as compared to the credit card interest rates. Furthermore, the Home Equity Loans are considered secured as they are backed by the collateral of the borrowers’ home. Lenders consider this option as less risky which eventually leads to lower interest rates.
Another advantage of a home equity loan is the option of lump sum money payment it provides along with the line of credit option. The option of easy access to the large sum of money attracts a lot of buyers to home equity loans as it allows them to cover the immediate financial needs such as paying off credit card/medical bills, house renovation costs or other major expenses easily.
Potential tax benefit on the home equity loan is another attractive feature of this unique financial tool. In some cases, even the 100% of the home equity loan interest payments may be tax deductible, unlike the credit card debts.
Backed by the guarantee of the house, the home equity loans are much easier to qualify for.
Word of Caution
Although Home Equity Loan is an excellent way to fulfill the immediate financial needs such as paying dues etc out of equity you have already built on your house, it is important to aware about the risks as well.
Taking too much equity out of the home without proper planning could leave you in financial trouble if your house eventually loses value. In extreme cases, the inability to pay back the second mortgage in the form of the Home Equity Loan could even leave you without a house.
What to do?
- Weigh all the pros and cons before opting for the Home Equity loan
- Make the payments timely for the life of the loan to avoid the risk of losing the house
of homebuyers stated that price is most
important when considering a mortgage