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Understanding Home Equity Loans

Aug 17, 2007
Almost any given day of the week there's a good chance you'll see at least one advertisement for a home equity loan on television. They are certainly growing in popularity. How do they work; however, and are there any benefits in them for you?

Basically a home equity loan allows you to borrow money using your home as collateral as long as you have paid down the original home loan so that you now have equity built up in the home. Let's say you originally bought the home for $100,000 and have paid that loan down to $75,000. The home has also appreciated in value and is now worth $125,000. You could potentially take out a home equity loan for $50,000.

There are definitely some advantages to home equity loans. One of the most important is that you can usually obtain a lower interest rate on a home equity loan than many other types of loans. In addition, even if you have problems with your credit, you can probably still qualify for a home equity loan because you're using the equity you've built up in your home as collateral. In addition, the interest you pay on the loan is typically tax deductible. Finally, unlike other types of loans in which you may only be able to borrow a small amount, with this type of loan you usually borrow far more.

Individuals who are considering large purchases often find home equity loans to be quite attractive. Such expenses might include the purchase of a vehicle, remodeling expenses, vacation, medical or education costs. In some cases, it can also be beneficial to consolidate debts that carry a high interest rate and pay them off with a lower interest home equity loan.

Like most everything else in life; however, there are some disadvantages to a home equity loan. One of the most important is that if you cannot meet the new payments for the loan, you could be at risk of losing your home. In addition, as more and more home equity loan lenders pop up, it has become increasingly apparent that some are being run by conmen who are only out to make a quick buck. Be sure to always check out any lender you consider with the Better Business Bureau to make sure they are actually legitimate.

Of course, the large number of lenders offering home equity loans today can actually be a positive factor for you because it means you have more bargaining power in terms of shopping around for the best rates.

Still not sure whether a home equity loan is right for you? Always make sure you are getting the best quote possible and ask yourself whether the reason for the loan is worth the risk you may be taking. If you feel that it is and you are confident you will be able to meet the payment schedule without becoming overburdened financially, start by doing your research first to ensure you have all of your bases covered.
About the Author
Joe Kenny writes for the Credit Card Guide, offering views on credit cards in the UK, visit them today for some great 0% balance transfer offers and start clearing credit card debt today.
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