You may be fortunate enough to already own your dream home. From time to time though you may wish that you have additional funds on hand to help you attain your other dreams and goals. Owning a house may be the answer to your prayers in that it can provide you the basis for borrowing more funds to help you achieve your goals. This can be done simply by making a home equity loan.
But why is this type of loan the best option for getting additional funds? To understand the answer to this question it will help to first learn how it works. Even as you repay the mortgage amount for your house, your home builds up its asset value. This is the “equity” of the home. The equity refers to the difference between the current market value of the home and the outstanding mortgage amount. Even if your home is mortgaged to any financial institution, you are eligible to use the equity of your home as collateral to obtain a large amount of credit.
There are several reasons why you should consider this type of loan as the best option for getting additional funds. Firstly, you can get a loan at a reasonable home equity loan rate even though the interest rate may seem a bit higher than that of your first mortgage. This is because the bank providing the loan would only have second claim on the property in case of default, and this is why the home equity loan providers charge a risk premium. This appears as the additional interest in your loan agreement.
Secondly, this type of loan allows you a significant tax deduction. As opposed to consumer loan interest, home equity loan interest is tax-deductible. For this reason, it makes more financial sense to use home equity loan to consolidate your loan rather than taking out a consumer loan.
You may also have others debts which involve paying off huge amount of interests. It will be much wiser to take out a home equity loan to consolidate these debts, such as credit card debt or debts incurred for expenses like paying off medical bills or paying off for your child’s higher education.
There are a number of financial institutions that offer these loans and to get the best rate, it is a good idea to shop around first. Various kinds of repayment methods are available depending on your financial situation and the type of interest rate you seek, namely variable or fixed rates.
Before taking out a home equity loan make sure that you have all the means at your disposal to repay the loan off as quickly as possible. Do not unnecessarily risk losing your home, unless you feel that this financial burden is surely going to add some long-term value to your life.
Posts Tagged ‘Dream Home’
Financial Advantages Of Home Equity Loans
December 30th, 2009The Basics Of Home Equity Loans
October 27th, 2009While on the look out for your dream home, you might have come across the terms “equity” and “home equity loans.” Below is an explanation to help you understand these terms.
What Is Equity?
Suppose the value of your home is $200,000 and the mortagage value is $50,000. The equity value of your home is $150,000. Equity is the difference between the value of your home and the mortgage balance.
Home equity loans have lower interest rates that are not subject to tax. Hence, it has become the most preferred option for home buyers. People use home equity loans in case of big expenses like weddings and home renovations. However, you should be careful, since you’re putting your home up as security. If you fail to pay it back, you may lose your home.
It is not advisable to take equity loans for paying off your credit card dues, especially if you cannot refrain from indulging in extravagances, as this will lead to more debts.
Types of Home Equity Loans
Home equity loans are of two kinds:
Traditional home equity loan or second mortgage: The bank provides a substantial amount of cash that you must pay back over a period. Here, interest starts right on the day the bank gives you money.
Home equity line of credit: The bank offers a credit card or a checkbook for purchases. This is collected against the equity of your home. Here, interest starts only after you make a purchase.
Paying A Home Equity Loan
Home equity loans can be paid in many ways. Usually, people pay them by making regular payments under the interest as well as the principal. In some loans, you have the flexibility of paying only the interest initially. Then there are loans that give you an option of getting rid of the principal faster by paying some extra amount. However, it is better to check out this option with your lender, as there are some loans that fine you for paying ahead.
How To Find A Home Equity Loan
It is wise to go to a bank that is different from the one that has your frst mortgage. Always do some comparisons before making the final decision, in order to get the best interest rates and terms on the loan.
Most home equity loans have different interest rates. Some of them come with a fixed interest rate while others have small introductory rates. Certain loans come with high closing costs and annual charges.
Then there are loans featuring huge balloon payments. Others have no balloon payments and come with large monthly payments.
An After Thought
Finding the best home equity loan requires some effort, but it is rewardig at the end. It can help you pay off debts or acquire money to start a new business venture.
By: David Gass
