What is a Home Equity Loan?
Home equity loans are much like other forms of loans except the fact that they are secured by a second mortgage on your home. Thus, in Home Equity Loan your home is used as the collateral to cover the risk of the lender. With a Home Equity Loan a set amount of money is loaned over a set period of time, rather than a revolving credit line. Home equity is determined by deducting what you owe from what your house is worth. In general, you can borrow up to 85% of the market value of your home.
Benefits of home equity loan:There are many advantages of getting a home equity loan.
- Low or competitive interest rates: As the loan is secured and default risk for lender is low, the interest rate on home equity loan is lower than any other unsecured loan such as credit card, personal loan, etc. However, in some cases, the interest rate is higher than that on a normal mortgage, as the home loan equity lender holds only the second mortgage and not the primary mortgage.
- Available with both fixed and adjustable interest rates.
- Tax deduction. Interest paid on home loan equity, in most cases, ca be used as a tax deduction.
- Maximum use of your investment in home. Home equity is a valuable asset and you can maximize benefits out of it without selling it.
Disadvantages of home equity loan:There are some disadvantages associated with home equity loan.
- The biggest drawback of home equity loan is that if you can't keep up with the payments, your home may face foreclosure. In addition, when you decrease your homes equity value, you also reduce the ownership you have in your property.
- Finally, aside from the interest you will pay on the home equity loan, there are also some costs associated with taking out a home equity loan that are similar to when you took out your first mortgage.
- In addition, because Home Equity Loan loans give you relatively easy access to cash, you might find yourself borrow money more freely.