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Home Equity Loans. Are They Worth It?

By Edited Jan 20, 2016 0 0

Refinance your Home

Are you a homeowner and you need to raise money for whatever purpose? Maybe you need money to pay off emergency medical bills, use as capital for a business venture, fund a major house repair or finance your child's college education. Then you need not look far to find a source of ready money you can take advantage of. If you own your home, you practically have a great asset in your hands from which you can extract more financial value through home equity loans.

What are home equity types of loans, you may ask. This is a type of financing wherein the borrower, particularly a homeowner, uses the equity in the property as collateral. Equity is defined as the value of the borrower's unencumbered interest in his property. In simple terms, equity is the fair market value of your home after you subtract the unpaid balance of your mortgage and other outstanding debts. For example, your home is worth $300,000 and you still have $100,000 left to pay on your existing mortgage, then the equity is $200,000. This basically means that lenders will be willing to provide you with a home equity loan of up to $200,000.

As you continue to pay mortgage, the value of your house also increases. And even if your property is mortgage to a bank or any other financial institution, you are still qualified to obtain money of a considerably large whenever you need it. Thus, if you are a homeowner, even if you don't have a good credit standing, these types may be the best way you can get your hands on funds.

You may be thinking that it is too good to be true. Are home equity loans really worth it?
I will be glad to answer you with a resounding 'yes'. They are indeed worth it. Let me show you the reasons why.

Home equity loan

First, home equity loans have a lower interest rate or annual percentage rate. Lenders will also be able to provide you a lower rate because your lender would only have a second claim on your house in case you default. This is the reason why these providers ask for a risk premium.  However, depending on your credit score this could vary.

Another reason why a home equity loan may be worth it is the relative ease to qualify. Even if you have bad credit, you can still be eligible for such a loan. This is because lenders are more generous with home equity loans and view such them as rather safe compared to other forms of loans. The rationale behind this is that the lender will always have a good chance of collecting collateral because when you default, of course you can't disappear or hide along with your house. Thus, the relative ease for homeowners to qualify for this type of loan. Home equity payments can also be tax deductible, thus making it more convenient on the part of the borrower. Again, if you have a bad credit score, your rate of interest could be higher than the person who has a better score.

Home equity loans can help raise your credit score.  If you are working hard to repair your credit and you decide this  is for you, make sure you pay it back.  Of course, this is common sense.  However, these type of transactions can put your house at risk.  If you are dedicated to improving your credit scores, home equity and HELOC types can help you.  These both provide you with money you can pay off other creditors with.  One word of caution when doing this, if you are using this to pay off other bills, you should ask yourself the question "Is this important enough to risk losing my home for?"  If the answer is "no," then do not attempt this type of consolidation techniques.  Go with the personal type of loans. 

Perhaps the most important advantage of home equity loans is the relatively large amount you can borrow. This makes it the best refinancing option if you need cash on hand immediately.

Still, home equity loans also have some disadvantages you should be aware of. Most important of these is that you can possibly lose your home if you fail to follow the payment schedule prescribed within the contract. Other possible pitfalls are some unscrupulous scammers who might cheat unwitting borrowers. The best way to protect yourself from such scammers is to always verify if the deal is legitimate or if the people you are doing business with are trustworthy.

Money House

These are just some of the reasons why a home equity loan is worth it and may be the best option you can have when looking for a source of cash. If you need more information, you have several options, including banks, credit unions and even brokers. You can also ask your network of relatives and friends for any referrals of lenders. Ultimately, before you put your home at risk, make sure that the deal will turn out in your best interest and that the loan will not overstrain your budget.



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