Because of a rapid increase in home prices, the equity is many homes have doubled. In this instance, homeowners have several available options. They may choose to sell their homes and acquire the equity, or choose a home equity loan. The latter allows homeowners to tap into their equity without relocating. Despite the many advantages of a home equity loan, there are risks to using your home as collateral.
How is a Home Equity Loan Protected?
Before applying for any type of loan with a bank or credit union, the lender will review several factors. One important factor is collateral. Collateral is essentially security, which is in the form of a valuable piece of property. In terms of home equity loans, your home functions as the collateral. As a result, these loans are easy to acquire.
Nonetheless, there are certain limitations. For example, the home equity loan cannot exceed the dollar amount of the home’s equity. Moreover, homeowners may not qualify for a huge loan.
Benefits of Using Your Home as Collateral
There are many common uses of a secured home equity loan. Some homeowners have specific purposes, whereas others simply use the money to build a nice nest egg or cash reserve.
If choosing to obtain a home equity loan, the money should be used responsibly. For example, loans are ideal for starting a new business or paying for a wedding. Some homeowners also use the money to pay for college tuitions or consolidate high interest debts.
Risks of a Home Equity Loan
The biggest risk surrounding home equity loans involves the loan defaulting, and the lender foreclosing. Although home equity loans are not primary mortgages, failure to repay will have serious consequences.
When a home equity loan defaults, regardless of whether a homeowner remained current with their first mortgage, losing the home becomes a strong possibility. Thus, homeowners should avoid home equity loans if their finances are shaky.
Although some lenders will not approve questionable loan applications, others will readily approve a loan to non-qualifying applicants. When the loan defaults, the lender will claim the property and resell it.
