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Equity Equals Cash With A Home Equity Loans

Banks allow people to borrow money against the value of their home, and often people blow the money on toys and luxury items. This, in turn, puts them even farther into debt. There are many positive uses for home equity loans as well, though, and the money can be used wisely. Home equity loans allow homeowners to enjoy their house’s equity without having to sell their home.

What Is A Home Equity Loan?

Home equity loans are secured by the value of a person’s home. The amount of the loan depends on the home’s equity, which is based on the home’s appraised value and how much of the mortgage a homeowner has paid off.

There are several types of home equity loans: a standard home equity loan, a home equity line of credit, and cash out refinancing.

A standard home equity loan provides a borrower with a lump sum for the home’s value and charges them interest on it. Borrowers pay monthly. When the loan is paid off, they are once again the owners of their own home.

A home equity line of credit offers borrowers an amount of money up to the value of their home, puts it into a special account, and charges them interest on the money they withdrawal. Home equity lines of credit often have flexible interest rates, meaning that they can charge borrows different rates at different times throughout the life of the loan. Much like a credit card, if a borrower is late on a payment their interest rates may become unbearably high.

Cash out refinancing is when a borrower takes out a new mortgage for more than the house is worth. They get cash for the extra amount, and then pay a monthly fee that goes toward their original mortgage as well as the cash.

What Are The Pros And Cons Of A Home Equity Loan?

A positive element of a home equity loan is that it is tax deductable. Borrowers can deduct up to $100,000 per year on the interest they pay on their loan.

Home equity loans are very attractive because while their interest rate is often higher than the homeowner’s mortgage rate, the rates are lower than automobile and credit card interest rates. The money one gets from the loan can be used to cover absolutely anything. It can go to home improvements, home repairs, upgrades, college tuition, or even a vacation.

There are many possible pitfalls associated with using a home equity loan. First of all, if someone fails to pay for their loan they will lose their house. Older homeowners should also be wary about using a home equity loan because it taps into their equity, which may be a good portion of their retirement nest egg.

Landlords should carefully read the terms and conditions of a home equity loan, because some loans forbid borrowers from leasing the house out so long as they are paying off the loan.

A home equity loan is a quick way to go into debt if not properly managed. If one’s home equity is taken and used to purchase frivolous things, a homeowner will not only owe a whole lot more than they did before but may also owe more than their home is worth.

Before getting a home equity loan, a homeowner must carefully access their financial situation and weigh the risks versus the benefits. While the extra money may come in handy for building a new addition to the house or revamping an outdated interior, the collateral is pretty high. After all, if the home owner fails to pay for his loan his home may go into foreclosure. Then he will have no home, no addition or furnishings, and a very bad credit score.

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