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UNDERSTANDING HOME EQUITY LOANS
A home-equity loan is a second mortgage that allows homeowners
to leverage the equity in their homes. Homeowners can deduct up to
$100,000 of the interest rates associated with home equity loans
from their taxes. Get more info on the
tax benefits of equity loans.
Below is information on how these loans and what
the potential benefits and downfalls are.
Please note that Star Loan Services will help you
develop a
home equity loan that will get you the cash you need without
hurting your ability to pay day-to-day living expenses.
Apply now for a free home equity loan quote.
Common Types of Home-Equity Loans
Home equity loans are available in two categories - lines of credit
and fixed-rate loans. Both types are typically available for loan
terms ranging from 5 - 15 years. Another basic similarity is that
when you sell your home, both loans must be paid in full .
Home-Equity Line of Credit
A home-equity line of credit, otherwise known as a HELOC, is
a variable-rate loan that has similar properties as a credit card.
Borrowing homeowners get pre-approved for a specific spending limit.
These funds can be withdrawn when needed via specially issued checks
or a credit card. Monthly payments for a HELOC will vary, depending
on the loan amount and the current interest rates. Loan terms for
home equity lines of credit are fixed. When your loan term expires,
the balance must be paid in full.
Fixed-Rate Loans
A fixed rate home equity loan provides a lump sum of cash
for the borrower. This loan is repaid at an agreed-upon interest
rate,
over a set period of time at. The interest rate associated with
these loans will remain the same for the entire life of the loan.
Therefore your payments will also remain the same.
Learn which loan type is better for you by reviewing the 'equity
loans vs. line of credit' section.
Benefits of Equity Loans for Consumers
These types of loans provide fast cash. Although the interest
rates are typically higher than first mortgages, they are lower than
the interest rates associated with
credit cards and other types of
consumer loans. As such, borrowing against your home's equity for
consolidating debt is one of the more popular home equity loan
purposes.
As mentioned, another advantage of home equity loans are the tax
deductions they offer.
In conclusion, when you consolidate your debt with a home equity
loan, you get a single payment with reduced interest rates and
tax
benefits.
Advantages for Lenders
Home-equity loans offer great benefits for lenders. After
collecting interest and fees on a borrower's first mortgage, earns
more interest and fees via an equity loan. Also, if the homeowner
goes into default on their loan, the lender gets to keep all of the
money earned in the home equity loan as well as the money earned
from the initial mortgage. They also get to repossess the property
and sell it again. From a business model, this is a very good
arrangement for lenders.
The Proper Way of Utilizing a Home-Equity Loan
Because of the low interest rates and tax deductibility, home
equity loans are a great source of funding if you have steady income
that allow you to repay your loan. A fixed rate home equity loan
allows borrowers to make large item purchases,
home improvements,
pay for college and/or consolidate debts. Read more about
equity loan advantages.
The Downside of a HELOC
The main negative of home equity loans is that they seem to
provide a quick fix for a borrower that has already fallen into a
recurring cycle of spending, borrowing, spending, borrowing and so
on. Ultimately, utilizing a HELOC in this type of situation will
result in deepening debt.
Lenders often will allow a borrower to reload on their loan. This
means freeing up even more equity from their home, sometimes up to
125% of the home's value. The fees associated with this type of
equity loan are higher since you are borrowing money that is more
than the home is worth. More specifically, you are borrowing with no
collateral. In addition to the higher fees, the interest rates are
not tax deductible.
Another drawback occurs when borrowers take out
equity loans for funding home improvements. Remodeling your kitchen
or living room will add value to your home. However, a new pool only
adds as much value as any potential buyer may see.
In Conclusion...
Using your home's equity is a gamble. If you are going to use
your loan for items that are not necessities, you need to be 100%
that you can repay your loan. Make sure you understand your loan and
all the fees involved. Make sure you can pay your loan without risk
of not having money to pay your other bills. If you have any questions
about home equity loans, please
contact us.
Learn what
criteria lenders use when determining approvals.
Many people will utilize two
mortgages, a home equity loan, and a fixed rate loan. After time,
they decide that they would like to pay down one of the loans
faster. We feature a section that will help you
determine
which of your loans you should pay down first.
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