Financial Advantages Of Home Equity Loans

November 18, 2008 by · 6 Comments
Filed under: Blog 

You may be fortunate enough to already own your dream home. From time to time though you may wish that you have additional funds on hand to help you attain your other dreams and goals. Owning a house may be the answer to your prayers in that it can provide you the basis for borrowing more funds to help you achieve your goals. This can be done simply by making a home equity loan.

But why is this type of loan the best option for getting additional funds? To understand the answer to this question it will help to first learn how it works. Even as you repay the mortgage amount for your house, your home builds up its asset value. This is the “equity” of the home. The equity refers to the difference between the current market value of the home and the outstanding mortgage amount. Even if your home is mortgaged to any financial institution, you are eligible to use the equity of your home as collateral to obtain a large amount of credit.

There are several reasons why you should consider this type of loan as the best option for getting additional funds. Firstly, you can get a loan at a reasonable home equity loan rate even though the interest rate may seem a bit higher than that of your first mortgage. This is because the bank providing the loan would only have second claim on the property in case of default, and this is why the home equity loan providers charge a risk premium. This appears as the additional interest in your loan agreement.

Secondly, this type of loan allows you a significant tax deduction. As opposed to consumer loan interest, home equity loan interest is tax-deductible. For this reason, it makes more financial sense to use home equity loan to consolidate your loan rather than taking out a consumer loan.

You may also have others debts which involve paying off huge amount of interests. It will be much wiser to take out a home equity loan to consolidate these debts, such as credit card debt or debts incurred for expenses like paying off medical bills or paying off for your child’s higher education.

There are a number of financial institutions that offer these loans and to get the best rate, it is a good idea to shop around first. Various kinds of repayment methods are available depending on your financial situation and the type of interest rate you seek, namely variable or fixed rates.

Before taking out a home equity loan make sure that you have all the means at your disposal to repay the loan off as quickly as possible. Do not unnecessarily risk losing your home, unless you feel that this financial burden is surely going to add some long-term value to your life.

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Comments

6 Responses to “Financial Advantages Of Home Equity Loans”
  1. Carole B says:

    What are the risk linked to a home equity loan?
    What are the risk linked to a home equity loan?
    want to take a home equity loan to consolidate debt. What are the possible risk. Will I lose my house, will the financial company be own the title of my house if they finance me? Do you have an experience with home equity loan. Advantages and disadvantages. thanks a lot

  2. Nelson_DeVon says:

    One of the bid advantages is that you can usually get a low rate, and you can write off the interest on your taxes if you qualify.

    The big disadvantage is that people many times pay off credit cards, but then just fill up their credit cards again. Then they lose their home.

    The loan itself is not a bad thing it is the person's money management skills which are dangerous.
    References :

  3. Faye H says:

    I have a home equity line of credit on my house. It's there if I should need it although, it has a zero balance at the moment. The advantage is, interest on it is tax deductible. The disadvantage is if you use it to pay off other debt and then run up debt again, you then have two payments to make.

    The Home Equity loan has a lien on your house just like your first mortgage does. If you sell the house, your first mortgage gets paid off first, the Home Equity loan gets paid off second. You get what's left over.
    References :

  4. Bruce T says:

    Nelson has good solid advice, once you pay off credit debt make sure you tear up those credit cards. A HELOC or Home Equity Line of Credit does put your home at risk because it is used as collateral. When you get approved for the Line of Credit you will be issued a "check book" to write checks up to the allowable amount.

    Use it wisely.
    References :
    Bruce T
    Mortgage Loan Officer

  5. jack says:

    i think that the below website will help you to find the right solution and also help to get full details about all type of loans.
    References :
    http://easycashloan.50webs.com

  6. Home Loan Guru says:

    In general, a home equity loan is a great way to consolidate debt. The risks are few and the cost is usually much lower than other debts, such as credit cards or bills, but since you asked about risk and advantages, here are a few:

    The main risk of a home equity loan is the same as any mortgage: you can only lose your home if you default on the loan (that is, fail to pay it back) and your home goes into foreclosure. But this is always a last resort and never in anyone's best interest.

    Also, home equity lines of credit are tied with adjustable rates which can change, depending on what the Fed does (but also depends on when your loan is set to adjust). But they are always usually lower than credit card rates.

    Just to clarify — you can get a fixed rate with a home equity loan for up to 30 years. The main difference between the two is that home equity loans give you your money in a lump sum; home equity lines are like credit cards in that you can draw from the account when you need the money. For a one-time consolidation, a home equity loan might be a better choice; however, that's a decision you should talk over with your mortgage professional.

    The main advantage to either is that you most likely can deduct the mortgage interest on a home equity loan from your taxes, whereas you can't do that with credit card interest. Plus, by getting rid of credit card debt, you could raise your credit score which could lead to better loan terms and rates in the future.

    Hope this helps!
    References :
    http://www.quickenloans.com/home_equity_loan/articles/best_home_equity_loan.html

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