Unlike other forms of loans, a home equity loan can be an especially risky loan because of what’s at stake. Although it allows one to borrow a substantial amount of money, usually around 80% of the market value on the home (subtracting whatever is currently owed on the home), you must keep in mind that the most valuable and precious asset available, your very home, is at risk if payments are not kept up. However, for those willing to take the risk there are many upsides as well to this form of lending. We are here to help you balance the advantages and disadvantages of a home equity loan. These are the facts that you need to know.
The Facts
A home equity loan, essentially, is just a second mortgage, and like the first mortgage, the security is in the form of your home. A home equity loan can come in two forms, the first being the term or closed-end loan. Basically, you can receive a lump sum of cash upfront from your lender that must be paid off over a fixed period of time at a fixed interest rate. Your payments will be the same each month. Once you've received the lump sum, you are not entitled to additional funds. This loan, which is very similar to a first mortgage, enables you to know in advance exactly what your payments will be.
Before even considering a home equity loan, one of the first things you should look into are the fees associated with your loan. Home equity loans can be very tricky. You should be smart and look at the fine print to make sure you are not going to be hit with any hidden fees or guidelines that will only end up hurting you dearly in the end. Don’t be afraid to confront your lender with questions regarding your loan. In fact, fees and rates associated can even dropped or lowered by your lender, you just have to be firm and not give in right away. Keep in mind that home equity loans are an extremely competitive market and you should shop around and haggle with lenders to try to get the best possible deal you can involving the least amount of fees. Types of fees can include upfront fees, closing costs, annual fees, etc.
The other form is best defined by its initials, HELOC (Home Equity Line of Credit). The lender decides in advance how much you can draw out in a given period of time. During that period, you can tap into your pre-approved line of credit whenever it is needed. That means you only pay for the money that you actually borrow, a plus for most who are not sure exactly how much money they will require or have ongoing projects. As you pay back your loan, your credit can be used over and over. For example, say you have a $35,000 line of credit. You borrow $15,000 and then several months later pay back $5,000, meaning there is now $25,000 still available.
In summation, the term loan is generally best suited for those who need cash for a one time project. In contrast, the HELOC, or line of credit, can be the best choice for those who have continuous projects.
Home Equity Loans: Positives
Obviously the biggest plus with a home equity loan is the sheer amount of money that can be borrowed. Used wisely, a home equity loan can be a prime choice for getting through tough times. As long as you pay attention to the fine print and take the necessary time to make sure the deal is right for you, a home equity loan should be a pleasant ordeal. Here are some notable positives with this kind of loan:
· Nothing is set in stone until you sign the contract. Rates are flexible, the market is competitive, and only too many lenders are willing to offer you “great” deals. Due to this and the fact that rates are at an all time low, now is a prime time to get a home equity loan if you are interested in one. When the house is the collateral, the lender has very little to worry about. For this reason, interest rates are generally quite low and can be found in either fixed or adjustable forms.
· The money! Home equity loans can provide you with a large amount of money, and we all know that there are those times that we just need it. Up to 80% of the market value on your home minus whatever you owe on the house can be borrowed in a home equity loan, good for those rough times.
· Save on taxes. Interest that you pay on your home equity loan can be used as a tax write-off to help save you money.
Negatives
Whilst the positives seem attractive, there are also many negatives that go along with a home equity loan. Any interested in this form of a loan should closely evaluate these negatives first and foremost.
· Obviously the most glaring issue is that the security on the loan is your home; if you are unable to keep up with the payments then you could very easily lose it. Young homeowners are not advised to pursue a home equity loan in particular. Those without substantial savings, plenty of disposable income, and a secure job are also advised to look elsewhere.
· Bad lenders. Always, always read the fine print or have a lawyer read it over for you to make sure you stay safe. Hidden fees and terms can be written into the deal and it is best to take the necessary time to make sure that the deal offered is right for you.
· As usual, fees are always a big issue. Home equity loans do carry many different forms of fees on top of the standard rate, and although they can be lowered when drawing up the terms of the loan, it is important to understand the fees and be ready to handle them when they arise.
· The money. Money is both a positive and negative aspect of any home equity loan because of this fact: those who don’t have money want money, and those who have money want more. Keep that in mind. Will you really be happy with how much you will be getting out of it? How confident are you that you are not going to overspend what you borrowed and get yourself further into debt?
So, when it comes time to make the decision on whether or not a home equity loan is right for you, be sure to examine all of the positives and negatives associated with this type of loan. Just make sure it is the right choice for you. It can be both a very good thing as well as a very destructive thing.
Refinancing is an option offered by many lenders. Feel free to use your second mortgage in order to refinance your first one. Obviously this could also lead to worse problems down the road if you aren’t careful.