Guide to Home Equity Loans: The Pros and Cons and How to Get One

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Guide to Home Equity Loans: The Pros and Cons and How to Get One

When you urgently need cash to cover an unexpected medical bill or pay off credit card debt, do you know that you can obtain immediate funding if you own a house? Under such circumstances, you can consider getting a home equity loan, which uses your home equity as security to borrow money. 

Home equity is the wealth you’re building up every time you pay your mortgage. It’s the difference between how much your property is worth and what you owe on your mortgage. To determine the equity you have in your house, simply subtract the remaining mortgage you need to settle from the market value of your property. 

Do you think you can tap into your house equity for your kid’s education? To help you decide if it would be a good move, get the basics about how a home equity loan works, its advantages and disadvantages, and how you can get this loan in this article. Read on.

Understanding How Home Equity Loans Work

A home equity loan is a general term that refers to any type of loan that allows homeowners to borrow money by using their house as collateral. It’s a type of second mortgage. The first mortgage is the one you used to buy your house. If you have built sufficient equity, you can then take a second loan against your property, and that’s the second mortgage.

When a lender accepts your home equity as security for a loan, you can have access to a large amount of money that can be paid out in a lump sum. You then need to repay your loan over a predetermined period with fixed monthly repayments. This payment includes both the principal amount and the interest, which will be set upon borrowing and should remain the same throughout the time you are repaying your loan. When you fail to pay, your house or property could be liquidated to cover the remaining balance of the loan. 

Another similar approach that uses home equity is the home equity line of credit (HELOC). In a home equity line of credit, you get a line of credit or the maximum amount that’s available for you to borrow. You can borrow from this amount anytime you want or when a need arises. It works like a credit card where you can borrow multiple times as long as you won’t exceed the maximum limit of your equity. That makes it different from a home equity loan. HELOC also has variable interest rates.

Use of Home Equity Loans

A home equity loan can be used in various ways. 

Home improvement

This is a very common reason why homeowners take home equity loans. It can be for a kitchen renovation, a new roof or the addition of a patio. These house improvement projects can make your place more comfortable and increase its curb appeal. When you take out a home equity loan for this purpose, you are actually using the value of your home to further increase its value. However, before you use your equity for home renovation or improvement, make sure that it will give you a good return on investment.  

Investments

The home equity loan can be used to fund investments, such as the stock market or real estate, with the hope of having returns that are higher than the cost of the loan. With this loan, you can also buy shares or bonds, invest in a new business or use it as a deposit for a second home or a new property. Although this approach is risky because you wouldn’t know how your investment will perform, a home equity loan is still a viable way to gain the funding that can build your retirement portfolio or grow your wealth.

Debt consolidation

If you have high-interest debt, you can use a home equity loan to consolidate and refinance it at a lower interest rate. This can get you out of that debt faster and save money for each month. A home equity loan can also pay for your other personal loans, such as credit card payments or car loans.

Emergency expenses

Although it’s advisable for someone to have an emergency fund that can cover 3-6 months of living expenses, it’s difficult to achieve for many. That’s why many borrowers still turn to home equity loans to fund an unexpected expense like a medical bill. As a word of caution, you should first have a plan to repay your debt if you’re going to take out a loan to cover a sudden emergency expense. Otherwise, it can lead to bigger problems in the future.

Lifestyle affordability

Whether it’s a dream vacation, kid’s education, wedding or a new car, a home equity loan can be used for these personal expenses. Just make sure to only take out debt that you can handle.

Advantages and Disadvantages of Home Equity Loans

Before you finally decide about getting a home equity loan, you must consider its advantages and disadvantages. Taking out this loan offers you the following benefits:

  • You can immediately access the funds.
  • You are not restricted on how you will use the fund. You can use it for any purpose.
  • You can easily qualify for this loan, even if you have a poor credit history. 
  • You will have lower borrowing costs because interest rates are lower than those of other consumer loans.
  • Interest rates are fixed throughout the repayment period.
  • The repayment terms are longer than those of other loans.
  • You can easily include your monthly repayments in your budget because they are fixed.

However, despite the many good reasons for taking out a home equity loan, it also features several drawbacks as follows:

  • You risk losing your property should you fail to repay your loan.
  • You’ll have another mortgage to pay, in addition to your primary mortgage.
  • You may need to pay for discharge costs to cover the paperwork and completion of the mortgage process.
  • If you plan on selling your house, you have to pay off the remaining balance for both the primary mortgage and the home equity loan.

Getting a Home Equity Loan

To qualify for a home equity loan, you should have a property with a high amount of equity available. Other lenders may also require you to have an excellent credit history, an estimate of your property’s worth and bank statements. These requirements will all vary according to the lender’s policies.

Before you apply for a home equity loan, you should first find lenders in your area and then compare their services. This will help you get the best deals available because different lenders offer different deals. You can start asking from your bank or a credit union or take recommendations from friends and families.

You can also look for potential home equity lenders by checking multiple lenders online or through a mortgage broker who may be representing many lenders. One reputable lender is Mango Credit who is a leading provider of bridging loans and short-term business finance in Australia. Mango Credit has been in the industry for more than 20 years already and has helped thousands of Australian’s with its simple financing process. You can read many Mango Credit Reviews online to learn about the positive experiences that customers have had in dealing with them.

If you have identified potential lenders already, you can then narrow your list to at least three and send your applications to them. If you become approved, they will send you quotes, which you can review and compare again for the best deal.

If you are really in need of quick cash for whatever reason, taking out a home equity loan can be a good option. However, you should be wise in choosing your lender and accessing the fund. You should also consider your capacity to repay the loan so you won’t end up having larger debts that you can’t pay off.

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