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Home Equity Loan : When And Why Get One

May 18, 2008
Home equity loans are an increasingly popular method for obtaining cash for needed major purchases such as home renovation. However, they should be used judiciously rather than lightly as there can be major drawbacks to their use.

Considering a home equity loan?

Consideration of the idea of a home equity loan should take advantage of the many ways to structure a loan for accessing the equity in your home. You will need to review your financial situation, your ability to repay a loan without undue stress financially or emotionally. Choosing the type of loan and the term will be an important consideration before signing on the dotted line. If you are making predictions or assumptions about your future ability to pay, are they realistic? Do you have a fall back position or is the loan itself the fall back position?

Advantages

Advantages for obtaining a home equity loan may seem pretty obvious to you. You will have a fairly significant amount of cash to do with as you choose, so make sure that the choices you make are going to improve the financial position. Another advantage is that you can use the money to actually improve your home equity for the future. You can also use funds to pay off debts or high interest credit card debt in order to free up cash monthly as well as pay less interest over the life of the debt.

Disadvantages

Although obtaining a home equity loan seems like an excellent idea financially, there are some disadvantages that should be considered before arriving at the decision to borrow additional money. The first is the fact that you are taking on more debt in many cases. Many homeowners believe that they will take the available funds from the loan and use it to pay bills or to pay off credit cards, but sometimes they have not taken the steps to put themselves on a budget and are thus maxed out on the credit cards again, with no further equity to access in the form of a home loan.

Types of loans

There are several types of home equity loan designs, depending on the use that you make of the funds and the strictures of your financial position. If you have need for funds to pay off a large medical bill for example, you may want to have the money in the form of a check handed to you at closing so that your debt can be cleared. Some loans are designed to replace the credit card balances you have accrued with a single larger payment. In this instance, the lender will cut the checks to clear the card balances and you may be required to surrender the cards at closing. In this instance, you will not receive much cash, just will have the peace of mind to be free of multiple credit card payments each month.

Typical terms

A home equity loan can come with many different terms. The level of the interest rate can vary in the same way the original mortgage rate will vary. These often depend upon the creditworthiness of the borrower. If your credit report score is in the high 700s to 800s, you will have the best terms available on your loan. Your interest rate is likely to be lower and you will have to pay less in the points and loan origination fees charged by the broker.
About the Author
In order to determine if a home equity loan is the right answer for you, you can review the resources of information, tactics and cautions available to you at Home Equity Loan or Home Equity.
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