Home Equity Loans: Top 5 Things You Should Know

The 2008 market crash made home equity loans unattainable for most people. But, after more than ten years of market rebounds, they are becoming popular again.

A home equity loan is a type of second mortgage. This is not a first-time home buyer loan. Instead, you can borrow money using the value of your home as collateral. There are several benefits to choosing this type of loan.

However, it is essential to understand home equity loans before you choose a lender. So keep reading to learn the top five things you need to know about these loans.

1. You Need Equity

Equity is the part of your home you already own. So, for example, if your home is worth $300,000 and you still owe the bank $100,000, you have $200,000 in equity.

Lenders call this the loan-to-value ratio. Usually, you must own at least 20% of your home before you qualify for a home equity loan.

2. There Are Two Different Loans

There are two main types of home equity loans. They are fixed-rate loans and home equity lines of credit (HELOC).

Fixed-rate loans give a single payment to borrowers. Borrowers repay the loan over a set period, plus interest.

A HELOC is a variable-rate loan. It functions like a credit card. First, borrowers are pre-approved for a spending limit. Then, they can withdraw money when they need it.

The user makes monthly payments based on the amount borrowed and the current interest rate. The time of a HELOC has two periods. They are the draw period and the repayment period.

3. Beware of Limits

Home equity loans and HELOCs have limits to how much you can borrow based on your loan-to-value ratio.

In addition, federal tax laws only allow you to deduct a certain amount of mortgage interest before you need to contribute.

While home equity loans offer lower rates than high-interest credit cards, they can also lead to further debt if not taken seriously.

4. Know the Risks

Home equity loans can trap people into a cycle of spending and borrowing. Lenders call this reloading.

The lender can foreclose your house if you are unable to make payments. Interest rates are low now, but they are rising. Therefore, you must consider the changing rates and the risks you take on with a home loan.

If you find yourself in a situation where you cannot pay, you can try to refinance a home loan or sell your home for cash fast.

Professional property specialists like those at URB Online can offer you cash within 24 hours, regardless of the home’s condition.

5. Keep Your Options Open

Ask your current lender for a quote first. Then ask at least two other lenders for a home loan quote. This will make sure you are getting the best rate available.

If you’re looking for home improvement loans, also shop around. Unfortunately, it can be challenging to recover the costs of significant home improvements using a home equity loan.

Learn More About Home Equity Loans

As you can see, home equity loans are beneficial for many people. However, they can also lead to more debt and the possibility of losing your home if you don’t take them seriously.

Before signing on with a lender, continue to research what type of loan is best for you from different lenders.

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