What Do You Need to Know About Home Equity Debt?

In cities across the country, home prices are raising so fast. You may be able to tap into the equity in your house for renovation projects to paying off credit card debts if you have owned a home for a decade. The difference between how much your home is worth and the mortgage you owe is equity. If you are curious about this, we will show you how does a home equity loan work?

You will be allowed to borrow money using the equity of your home as collateral. The line of credit or home equity loan is the second mortgage that will enable you to turn equity into cash. It allows you to spend on home improvements, debt consolidation, and other expenses like a college education.

Two Types of Home Equity Debt

Home equity loans and home equity lines of credit (HELOC) are two types of home equity debt. Your property secures both of them just like your primary mortgages. You might be confused about how does a home equity loan work, and it’s the difference with HELOC. Well, the home equity loan is a fixed-rate installment loan which means that all the money is borrowed in one lump sum at inception and will be repaid in evenly monthly installments over the term of your loan. On the other hand, HELOC has a variable interest rate that offers a great deal of flexibility on repayment and borrowing.

How to Avail?

To avail either of the two home equity debts, you need to have a minimum credit score of 620, the loan-to-value ratio of 80%, that’s 20% equity in your home, and an approximate amount you wanted to borrow.

To choose what is right for you, you need to consider what you plan to use for the money you wanted to borrow. If you are seeking debt consolidation or making a big-ticket purchase, home equity loan will work best for you. HELOC works more like a credit card because of its revolving balance. It is best if you have several large payments that are due overtime such as a big home improvement project.

The very thing that you need to take in mind is that you’re pledging your home as collateral; the lender could end up owning your house if you don’t make payments for your home. Still, be wise in deciding to have a loan.

Benefits

One of the benefits of a home equity loan is their low rates. They typically have lower interest rates than those unsecured loans like the credit cards and some personal loans. Having a low rate can help in keeping the borrowing cost low, but the closing costs may offset low rates.

If you have bad credit, the home equity loan may be the easiest way to qualify for a loan. It is because with your home securing the loan, the lenders will have a way to manage their risk. Another benefit is that the borrowers can be qualified to borrow large loans assuming you have a sufficient equity in the home.

Lastly, it’s potential tax benefits. You can deduct some of the interest you pay on a home equity loan, in particular, if you use the funds for “substantial improvements” to a property. However, it is highly recommended that you need to ask your tax preparer for details before you borrow and before you claim a deduction.

Leave a Reply

Your email address will not be published. Required fields are marked *