A loan taken out for the purpose of transforming the equity in your house into cash that can be used for other purposes is known as a home equity loan.  A loan taken with the equity in your home as collateral can be structured in many ways. It is actually a second mortgage in many ways, and will result in less of your home’s value being accessible should you decide to sell the property.  It is an excellent way to obtain access to a sizable amount of cash, depending on the amount you owe on your home and the market value of your home.  The difference is your home equity.

 

Advantages

 

Most borrowers determine that the home equity loan works to their advantage.

 

Single Payment

 

Using a loan against the equity in your home as opposed to trying to take out a combination of personal loans and increased credit card debt means that you will only have one payment monthly for the loan rather than a half dozen or dozen small ones.  The home equity loan as a single unit is probably going to be easier to obtain than numerous smaller loans all at the same time.  You only need remember the due date and amount on one loan and thus you can prepare for and budget well into the future.

 

Available Cash

 

When you take out an equity loan on your home, it usually results in a larger amount of cash available to you all at once.  No matter what the reason for the lump sum cash is, having it in one sum often serves as a way to give you a clean start from financial problems that are eating away at your financial freedom and at your sanity.

 

Disadvantages

 

It is important that you not lose sight of the disadvantages of the loan against home equity.

 

Increased debt

 

When you obtain a home equity loan, even if it is to pay off other debt, you will almost always increase the total amount of debt that you owe.  You should study carefully whether the increased debt is offset by the advantages that a single payment–possibly smaller in size is worth going even further into debt.  If your goal is to change the ability of your family to meet future obligations or to add to the debt load as an investment toward the future, such as paying for a college education for yourself or your family, the debt load may be justifiable.

 

Economy of the area

 

Before taking out a home equity loan, it is important to look realistically at the area’s economy.  If housing prices in the community or in your neighborhood are beginning to fall, obtaining an equity loan to improve your home so that you can sell it and move on may not be a good idea.  You may find that the increased asking price necessary to clear the loans on your house will mean no buyers will be able to qualify to purchase your house.

 




By: Alan Lim