What does a home equity loan mean?
It refers to a special home equity mortgage, which uses one’s own house as collateral. The value of the home-equity is calculated as a difference between the collateral’s market value and the mortgage-amount one owes. What are the reasons for people acquiring such a loan? Most of the time people require home equity loans for getting some cash quickly for personal matters: for educational fees or for making home improvements. But many other variants may be accepted.
The next thing to be discussed is the advantages of taking out a home equity loan. First, this loan may help one to consolidate their several debts
. It is more convenient for home-owners to transform their various debts into a single one by taking out a home equity loan. This way, instead of spending time with a number of different loans, one will only have to deal with a single contract with a single payment and deadline per month. It is more convenient, more time-saving, and one may even negotiate better terms for the new contract.
Besides this opportunity to obtain an easier financial planning, home equity loans can help people in financing their home improvements. The good point with this option is that it provides borrowers with advantageous interest-rates. Moreover, this step implies increasing one’s property-value as well as some tax-benefits, namely the option of writing off the interest-related fees on tax returns. All in all, with a home equity loan one can have lower-than-average interest rates and tax-deduction, but he/she can also obtain a considerable amount of cash quickly and easily.
Nevertheless, there are some disadvantages as well. First of all, this is a secured loan
, so one’s own home will act as collateral. Thus, if the borrower cannot meet certain loan-terms, the lender can legally repossess that property. Therefore home equity mortgage-loans require a serious reconsideration before being taken out. This implies that one needs to make a detailed calculation regarding one’s personal finances, and see whether he/she will be able to afford the monthly instalments needed for the home equity loan.
Another disadvantage of this loan-type is that its interest rate is changing continuously. This is due to lenders adjusting the charged interest rates to the changes occurring at the loan-market or in the economy in general. For most of the people, a changing interest-rate means insecurity, as monthly loan-payments might increase in such a way that it will be unacceptable for the borrower. The good news is that interest may decrease as well.
All in all, in order to decide whether to take out a home equity loan or not, the most essential thing is to be informed on the possibilities as well as on the terms and conditions. Similarly, it is recommended to understand the economic processes and to know both the development and the present and future situation of the property-market. Disadvantages also need to be taken into consideration, such as the various charges and the interest-rate cap. The latter states the maximum interest-rate increase in a year and for the whole loan-period, and this is probably the most important thing that determines whether it is advantageous to obtain a home equity loan.