Have you been thinking about a home equity loan but have some questions about how they can work for your personal finance? Here is some basic information about how a home equity line of credit works.
How a Home Equity Loan Works
A home equity loan is often referred to as a second mortgage. However, you can own a home with no loan debt and still apply for a home equity loan.
The majority of people who take out a home equity loan do so to upgrade their current home or to make emergency repairs on or around their home & property. However, there are a small percentage of borrowers who use the money to purchase a larger asset such as a new car, boat,college expenses, medical bills or to even pay large outstanding bills, if it deems to be a smart choice.
Basically, the borrower is using their home’s equity as collateral against the loan. A lien is placed against the borrower’s home and this lien will reduce your actual home equity until the loan is fully paid off.
The amount you get with a home equity loan will depend on several different things:
(a) the fair market value of your home
(b) the type of lender your dealing with
(c) the borrower’s current credit rating and
(d) what the borrower will be using the money for.
A lot of borrowers consider this type of loan because the interest deductible can help to reduce the borrower’s tax liability. A borrower can use the interest as a tax deduction in some cases, which means they save money. Personal loans do not offer perks of this nature.
If you need some financial help and own a home, this may be the way for you to go instead of taking out a personal loan which has hefty interest rates and high fees attached to it.
Always research your options and talk to a home loan lender to see if a home equity loan and line of credit will work for your situation.