Home equity loans
Having his own home is a dream for most people. A home signifies security and definitely makes one feel emotionally at ease. It is on the top of the priority list for most people. Once you start working you plan for your own home. However while clamoring for a home one thing that perhaps is never thought of is that in times of financial crisis it is the home that can bail you out. It is a fact that one can use the house as collateral and take a loan; this is termed as home equity loan. A home equity loan creates a lien against the borrower's house ,thus reducing the actual home equity. Such loans are generally referred to as second mortgages.
A home owner can pledge the house as collateral and borrow against it. For people who need a relatively large amount of money or who is handicapped by a not so good credit the home equity loan comes as a savior. Obviously such a loan is not used to finance day to day needs; it is used to meet some of the important and large expenses. Typically such a loan is used to pay for a child's college education, renovation of the house, purchase of a second home and at times in order to consolidate one's high interest debts.
home equity is also known as the real property value and is considered to be the market value of the home owner's interest in the actual property. The lender provides money to the home owner keeping in view the owner's financial status and the value of the property.
Advantages for lenders
home equity loans are very advantageous from the perspective of the lender. It is viewed as relatively safe. The borrower cannot hide the house or run away with it. Incase of a default it becomes easy for the lender to collect the collateral and thus recover his investment. Also, when a person's home is on the line he makes repayment of the loan a priority and so the lender doesn't have to waste his energy in making collection attempts.
Advantages for borrowers
home equity loans come with its advantages for borrowers. Firstly, this is a source of a large amount of loan. Secondly, these loans generally bear a lower interest rate. Thirdly, qualifying for such a loan is easy even with bad credit. An additional benefit is that payments on such loans are generally tax deductible.
Caveats
Before going in for a home equity loan it is very important to be aware of what you are getting into. It should not be lost sight of that failure to meet the payment schedule for the loan can lead to a loss of your home. Since you are pledging your most valuable asset it is very important to check the credentials of the party on the other side. There have been instances of people being duped in the name of home equity loans and in the process even losing their home. Avoid parties who are extra insistent in their sales pitch, offer much lower than market rates of interests and refuse to put down everything clearly in the loan contract.
There have been instances of people using a home equity loan to get out of a cycle of high cost credit card debts. Here it is important to point out that a home equity loan is a secured loan, that is, it is taken against a collateral, which the lender can sell off in case of non payment of the debt. In contrast, credit card debts are unsecured and no collateral is pledged for it. As such, by using a home equity loan to pay off credit card dues one is essentially converting an unsecured loan into a secured loan. The concomitant fall outs should be kept in mind before taking such a step.
Another point that needs to be kept in mind is that traditional mortgages are non-recourse loans whereas a home equity loan is generally a recourse loan. In a non recourse loan the loan is secured by a pledge of collateral but the individual borrower is not personally liable whereas in a recourse loan the personal liability of the borrower is there. This difference becomes important in cases of foreclosure as the borrower will remain personally liable for a recourse debt.
Closing the deal
Firstly clearly understand the implications of a home equity loan. Analyze your situation and make sure that this is what you need. If a simple credit card account can solve your problem do not unnecessarily go for a home equity loan. Do not put your home at risk for trivial needs. Only when you are convinced that the only answer to your problem is home equity loanshould you move ahead. After this, plan your budget and make sure that taking this loan will not financially overburden you. The next step is choosing the counter party. Look at different sources and compare different options to arrive at the best deal.
Difference with home equity Line of Credit
home equity loan is often assumed to be similar to home equity line of credit. Although the two share some common traits they are different from each other. While in case of a home equity loan the borrower gets the loan as a lump sum amount, in home equity line of credit he is given a line of credit and he can draw the amount required in installments through a period of five to twenty-five years. It operates on the basis of a revolving credit line with an adjustable rate of interest contrat to a home equity loan which comes with fixed rate of interest and is a one time payment.