The Important Facts About Home Equity Loans

Owning a home is one of the crowning achievements of young adults with a family of their own. The feeling of independence, of being hands-on in the fixing-up of a first-time home can be both frightening and exciting at the same time. Not only is it a new place to live, but it’s also a major financial investment feather in your cap. And that financial investment can lead to extra money in a few years in the form of a home equity loan. Here are a few points to consider when it comes to this type of credit.

Your House as a Credit Card

A home equity loan is what it sounds like – a financial institution provides you with an amount of money based on cash value of your residence. They determine how much the loan is from your information and a debt-to-value ratio study between how much is currently owed on the house versus its current market value. Families who’ve paid only a small amount into their home may be declined for a loan, regardless of how much the value has increased since they moved in. Additional debt or bad credit can also cause denial of a loan application.

There are two types of home equity loans. One is a straightforward loan, similar to what one would take out if purchasing a car or paying for college. If approved for the amount requested, the applicant receives a check or direct deposit for the full amount, to be used at their discretion. The other form is the home equity line of credit, or HELOC. In this variation, the loan works similar to a credit card. As it continues to be paid off, the available balance can be reused until the time the loan expires.

Payments

Considered a second mortgage, home equity loans have a set payment period similar to a primary home loan. Normally, the payment period is somewhere between 10 or 15 years, but there are programs that offer longer and shorter payment windows. How much the monthly installments are depends on the length of the loan and the interest amount. Many standard home equity loans feature a fixed rate, while lines of credit tend to have adjustable interest rates similar to those of credit cards. The upside to this is there may be periods where your payment can be lower. The downside – there are times where the monthly payments are higher, which could affect your budget. Consult financial institutions beforehand to determine the best interest rates for either the standard loan or line of credit.

Oh, one more thing — the interest you pay for a home equity loan is deductible on your annual taxes.

The Pitfalls

While a home equity loan sounds like a great way to pay off debts or make improvements to the house, there are some disadvantages. With a home equity line of credit the biggest pitfall is overuse of the money you’re given. If it’s constantly utilized without any major payments made, the amount owed at the end of the loan can be just as big as when it was first distributed. This may result in serious problems, including a black spot on credit reports, if the money isn’t available to pay off when it comes due.

Another downside to a home equity loan is its designation as a second mortgage. If there comes a time when the house is to be sold, both the primary and secondary mortgage will need to be considered when determining how much it should go for. If the market is weak, the extra amount owed on the home can be detrimental to its sale, resulting in a reduced amount of profit or, in some instances, money owed back to the bank. Thus, take careful consideration when deciding if a home equity loan is right for your young family at this moment in time.

 

One Response to The Important Facts About Home Equity Loans

  1. KC says:

    I think every loan deal has disadvantages but you have to wright the pros and the cons. Use it to your advantage. There might be a pitfall but that’s normal. You just got to find the right real estate investment, plan it well, and it will go according to your plan. If you happen to encounter a mishap, find a solution and move one.

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