Perhaps you want to finance major expenses like your children’s college education, are suddenly faced with large and unexpected medical bills, or would like to make major home improvements or repairs. A great way to get the funds is to opt for a home equity loan. Based on your credit history and the loan-to-value ratio of your property, you may be able to obtain a safe and convenient loan against your home.
What are home equity loans?
These are loans that are taken out using the borrower’s home equity or market value as collateral. Equity is calculated using the difference between the market value and the outstanding balance of the mortgage.
Home equity loans have recently been making a comeback after many years of scarcity on the market. For those with good credit, rates are lower than other forms of lending, such as personal/car loans or credit cards.
risks
Home equity loans can be easy to obtain if you meet the eligibility criteria and make financial sense if you have the equity, but there are several inherent risks:
• Variable or floating interest rates: they could always increase in the future
• Too easy to spend: You could end up with “buyer’s remorse” after splurging on a bunch of unnecessary things.
• Full Repayment: If you’re not financially savvy and don’t keep a tight rein, you could find yourself in trouble at the end of the loan term.
• Property loss – Defaults result in foreclosure and you could lose your own home.
That’s why exploiting the value of your home can be extremely risky if you take out a home equity loan without fully understanding the process and its implications.
Rules
Protect yourself and your family by learning more before you take out a home equity loan. It could be a disaster to wait if you are not aware of the implications and repercussions.
Here are some tips to keep in mind:
Back
• Remember that it is still a form of mortgage
• Keep careful records of all refunds and charges, including bank statements, bank records, canceled checks, etc. so you can challenge inaccuracies with solid evidence.
• Read the loan agreement very carefully
• Never hire unlicensed contractors to work on your home.
• Use the loan amount to make genuine improvements to your home or any specific purpose for which you borrowed.
• The loan amount can be used to overcome unexpected events/crises if you do not have an emergency fund
• Can be used to build a nest egg for retirement
• Check to see if there are tax or deductible benefits available
not to do
• It’s tempting, but never use your home equity loan to splurge on a bigger TV, boat, car, cruise, vacation, etc.
• If you plan to sell your home soon, avoid taking out a home equity loan.
• Don’t take out an unnecessarily large loan, keep it realistic. If the market falls, you could be caught in a massive redemption situation
• Don’t be pressured by strong marketing tactics: educate yourself and inform yourself
• Consult your family before taking out a loan
• Never sign documents that have blank spaces or one that you have not fully read and understood.
• If necessary, have the documents verified by an expert
• Evaluate your ability to pay and judge if you can really afford it
Today, interest rates are at an all-time low and the economy is improving. Many homeowners are considering a home equity loan, and in fact, it is a great option if you have the credit rating and eligibility. Also, if you also fully assessed the risks and benefits, you approached a reputable, well-established, trusted institution or organization and did some good research.