Home equity loans have certainly increased in popularity since 1996. Have you ever wondered how these loans actually work and if they provide any real benefits for you?
A home equity loan is a loan which allows you to borrow money using your home as collateral. Home equity is the part of your home which you own (have paid off) and is used as a guarantee for the loan.
To calculate the equity in your home you have to subtract the outstanding balance for your mortgage from the current value of your home. So for example, if the current value of your home is $320,000 and the mortgage balance is $270,000, you have $50,000 worth of equity in your home. Which a home equity loan you can borrow that $50,000 for personal use.
What are the disadvantages of a home equity loan?
The biggest disadvantage to a home equity loan is that you can lose your home if you are unable to make payment. Also when you take out a home equity loan, you reduce the amount of ownership you have in your home.
What are the advantages of a home equity loan?
By securing the home equity loan with your home, you present less risk to the lender. This low risk gets directly passed on to you in the form of a lower interest rate.
Another advantage is that the interest you pay on your home equity loan is tax deductible. Other types of unsecured debt such as credit cards don’t offer you this kind of advantage. So for example if you have paid $3,500 in interest on your loan, you will be able to reduce your income tax by that amount. There are even more advantages when you take out a home equity loan for home improvement.
Another advantage is that you should be able to get a home equity loan even if you have bad credit because you are using your home as collateral for the loan. However think twice before you do this.
If you are considering making a large purchase a home equity loan may be the way to go.
Common uses of home equity loans are: remodeling expenses, vacations, vehicles, medical expenses, education costs and paying of credit-card debt.
Posted in Loans
