For a homeowner, a home equity loan can be a nice way to pay off credit card debt, pay for college expenses, or do some home remodeling. Home equity loans have a much lower interest rate than credit cards. In addition, if you itemize your taxes, which most homeowners do, you may be able to deduct the interest.
Of course, as with all of the benefits, there are inevitable drawbacks. The main one is that with a home equity loan is the fact that your home is, in fact, the collateral for the loan. Even if you never miss a payment on your traditional mortgage, falling behind on your home equity repayment plan can cost you your home.
The amount that a bank or lending institution will allow you to borrow depends on a variety of factors. Typically what happens is that your home will be appraises. They will take this appraisal figure, and subtract the amount that you still owe on the mortgage. The difference is the amount of equity that you have in your home. Depending on your credit score, you can borrow up to about 80 percent of this number. A home equity loan typically pays out in a lump sum. You will be given a check from the bank that you deposit into your account and use for whatever reason you sought the loan.
You should shop around for a home equity line of credit just as you would a mortgage. Ask about up-front costs, closing cost, fees, and interest rates. Some home equity loans have variable interest rates. If you decide to go with a variable interest rate loan, make sure that you know what the rate caps at, and whether you can lock the rate in at any time.
Some home equity loans allow you to only pay interest on the loan, with a balloon payment due at the end of the loan cycle. While this may seem like a great way to keep monthly expenses down now, too often people end up needing to take out another loan to make the balloon payment or risk losing their home.
Home equity loans can be the perfect way to come up with a chunk of cash when you need it. The interest rate is hard to beat, and the tax write-off is an added bonus. The main drawback to a home equity loan is that they are easy. Owning a home with a little equity in it does not necessarily mean that you can afford more debt. If you are considering a home equity loan because of cash flow problems, be aware that you are risking your home if you are unable to repay the loan. While home equity loans can be the perfect solution for many financial dilemmas, there are other times when you may need to consider different options, such as picking up overtime at work, or taking a part-time job, to ease your cash flow woes.