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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 These funds can be withdrawn when needed via specially issued checks or a credit card.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.


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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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