You’ve probably seen the ads for home-equity loans. They normally show a tanned and fit couple frolicking on the beach during their dream vacation or an all-American-looking family smiling in front of their gorgeous new van. Sometimes they show a blushing bride to be wearing an engagement ring with a diamond the size of a Volkswagen or a kid grinning ear to ear as he opens the best Christmas present of his life.
Home-equity loans and home-equity lines of credit can be very convenient. In fact, they can be lifesavers if you have unexpected expenses or expenses you just can’t cover. This type of loans is taken, as the name implies, against the equity you’ve built up in your home. Your equity is used as collateral on the loan. Always remember, though, that there’s a big risk associated with home-equity loans. If you default on the loan, you lose your home.
What is a Home Equity Loan?
A home equity loan is simply a loan keyed to the equity in your home. The equity in your home is the value of your home less the balance of the mortgage you used to purchase the home and any other debt secured by the home, such as a tax lien, judgment lien, or second mortgage.
Using the equity buildup in a home to finance purchase is an alternative to refinancing. Home equity loans are of funds for homeowners to use for a variety of financial needs, including the following:
*To finance the purchase of expensive items.
*To consolidate existing installment loans or credit card debt.
*To pay medical, education, home improvement, or other expenses.
Obtaining a home equity loan has advantages and disadvantages. If all of your debts are unsecured and your house is exempt from collection. It’s almost never a good idea to put your home into jeopardy by getting a second mortgage or home equity line of credit. If you’re behind on your house payment, you’ll be better off negotiating a mortgage workout with your lender.
If you decide that you do want a home equity loan a mortgage workout or for some other reason, be sure you understand all the terms before you sign on the dotted line. It is extremely important that you find out how much the loan will cost you each month and determine whether you can afford it.
Consider the following pros and cons of home equity loans and credit lines.
Advantages of Home equity Loans and Credit Lines
You can barrow a fixed amount of money and repay it in equal monthly installments for a set period of time. Or, you can barrow as you need the money, drawing against the amount granted when you opened the account: you’ll pay off this type of loan as you would a credit Card bill.
The interest you pay may be fully deductible on your income tax return.
Disadvantages of Home Equity Loans
Some home equity loans are sold by predator lenders at very high rates. Predatory lenders target people in financial trouble or with past credit problems. Often, predator lenders count on the borrower not being able to make the loan payments and expect to foreclose on the house when the borrower fails to make payments.
Teaser rates might make a home equity loan look more attractive than it is. Equity loans often have a variable interest rate that rises or falls with a particular interest rate index. But often, the rate for the first six months to three years is much lower. Once the initial period ends, the rate automatically jumps up to the regular variable rate, which can make your loan payments much higher.
Before you take out s home equity loan, be sure you can afford the monthly payment.