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Positive and Negative Aspects of a Home Equity Loan

A home equity loan is known by another name a second mortgage. With a loan such as this, the homeowner borrows money from the equity that has built up in the home, using it in virtually any way wanted. The laws today allow a person to take out as much as $100,000 for a home equity loan and still deduct all interest at tax time. In addition to the understanding the variations for this type of loan, homeowners also need to learn the positive and negative aspects so they can determine if this is the right decision.

For starters, a home equity loan is available as a line of credit or fixed rate loan. Both loans can be taken out for a period of five to fifteen years but they are unique. The line of credit option, formally called a Home Equity Line of Credit or HELOC is a loan with variable rates. To get the money, the homeowner would have to be preapproved for a set spending limit, using the money whenever needed, as a line of credit.

With a Fixed Rate Equity Loan, the individual is provided equity in a single, lump sum payment. However, the money borrowed is paid back in installments according to the terms of the loan. Just as with a Fixed Rate Mortgage associated with a first or conventional loan, the interest for this type of equity loan would never change throughout the life of the loan.

In addition, the positive and negative aspects of an equity loan are important in that this gives the homeowner the opportunity to weigh everything out before signing an official contract. Obviously, an equity loan provides the homeowner with cash, which could be used to consolidate bills, pay off bills, take a vacation, complete home improvements, buy a car, pay for college, and the list goes on.

While interest charged on an equity loan is higher than a first mortgage, it is much less than what a person would pay to borrow money on a credit card. Therefore, an individual would be able to take out the amount of money needed at the time needed. The freedom to borrow money, but also get finances paid are huge benefits and the number one reasons that people take out an equity loan.

Now, while an equity loan has many positive sides, some risks are also associated with a loan such as this. For one thing, the homeowner locks into a mortgage loan, one that would be established with specific rules that must be followed. Therefore, just as with the initial mortgage, if payments were missed, the homeowner would be in a position of losing the property so it would be imperative for this person to have absolute confidence that the payments could be afforded and paid on time.

Additionally, any person that wants to take out a home equity loan needs to make 100% certain that the lender is honest. Typically, it would be most advantageous for the loan to be secured with the mortgage lender that has the first mortgage. However, if this were not a possibility, then the homeowner would need to look at options carefully. The reason is that hidden conditions and fees are common. For this reason, it is imperative that anyone considering an equity loan start by choosing the lender but also reading every word of the contract.

The truth is that an equity home loan offers many excellent values but because there are also some pitfalls, homeowners have to make the right decision. If not careful, it would be far too easy to fall into a cycle of spending and borrowing, soon depleting all of the home’s equity. However, if only the amount needed was borrowed and the funds used for a specific purpose, the home equity loan could prove to be an excellent solution.

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