Is a Home Equity Loan Right For Me?

Before making any decisions to take out any loans it is a good idea to be an informed consumer; this is especially true when it comes to taking out loans that use your home as collateral for the loan. It is very enticing when you learn that you have access to potentially tens of thousands of dollars. However, there are several key facts that you need to be aware of.

What It Is

A home equity line of credit (HELOC) is a loan that uses your home as collateral to provide to you access to the equity built up in your home over the time you've lived in it. You build equity in a home by making on-time payments towards your mortgage balance, and by maintaining the home to ensure its market value increases over time.

ProsMany people carry credit cards in their wallets; these credit cards come attached to huge interest rates that can make it seem impossible to ever pay off the balance on credit cards by making the minimum monthly payment. A home equity loan can provide you with the ability to immediately pay off those high interest credit cards and be free of the non-tax-deductible interest you pay on them. Interest paid towards the home equity loan is completely tax deductible; this is a much better use of your money than sending it all in full to a credit card company. A home equity loan can be used to pay for college tuition; the interest rate and other terms you receive on the HELOC can be a lot better than those you would have received from a tuition loan provider.

The lump sum payment from the home equity loan can be used, also, for home improvement projects that can, in turn, increase the value (and the equity) of your home. There are no restrictions on what you can spend the money on; from paying off debt, paying off medical bills, buying a new car, or installing a pool in your back yard. Compared to a regular loan from a lender, it can be relatively easy to get a home equity loan. In general, lenders feel quite confident that you will make the repayments on time simply because your home has been used as collateral.

ConsWhile it can be easier to obtain a home equity loan than it is to obtain a standard loan from a bank, you need to seriously consider if a loan that uses your home as collateral is a good choice for your family and your current financial situation. If your income situation changes will you still be able to make the required monthly repayments?

Oftentimes homeowners will use their home equity loan towards the starting up of and running of a small business; this can be a great investment if the company is successful. However, in the current economic climate it can be a very big gamble. If your business fails and you are unable to meet the payment requirements of the HELOC, you are at risk to losing your home.  Be sure to shop around either online, or in your community for low home equity loan rates.  A lower rate can be the difference in suceeding with the investment or going into foreclosure.

Ryan F - Real Estate and Mortgage professional.

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