The need for getting a loan can come up at any time and banks and other financial institutions usually ask the person requesting the banks for a loan to put up some kind of security. The most common asset that is usually put up as security is the individual’s home.
What is Home Equity Loan?
Home Equity Loan is a loan that is given to the person asking for a loan in lieu of his/her house instead of other assets like estate, land, car, etc. The loan amount is decided upon after the financial institution takes into consideration the value of the house at the time of requesting a loan and then subtracting the loan amount from it. The amount left after subtracting the loan is the amount value that will remain in ownership of the borrower.
Types of Home Equity Loan:
A Home Equity Loan is generally placed into one of these two groups:
- A second loan which is a type of loan where the collateral can be used to get multiple loans for various reasons like restoration of the home, a vacation, medical reasons, etc. The second mortgage carries a higher interest rate than the first existing mortgage because of the risk involved.. A Home Equity Loan is sometimes referred to as a Second Loan because the house can be used to get multiple loans according to the value of the house.
- In the Home Equity Line of Credit, the loan amount accessible to a borrower is deduced after subtracting a certain percentage of the current value of property from an already existing mortgage. The balance remaining is the credit line that is available to a borrower.
Need for a Home Equity Loan:
The most common reasons for taking a loan are for paying up earlier debts and existing loans, refurbishment of the home, clearing debts on credit cards, education loans, investing in business, medical emergencies, buying a car, or buying an additional house.
Advantages of taking a Home Equity Loan:
A Home Equity Loan is very convenient because of the low rates of interest charged as the chances of defaulting on a loan taken against one’s home and risking it being taken away act as a major deterrent.
Unlike credit cards and unsecured loan options, when a person takes a Home Equity Loan, the interest reimbursed against the first ?100,000 is exempt from tax.
A second loan makes a predetermined loan amount available which can be used for a single requirement or multiple needs as the borrower thinks necessary.
The Home Equity Line of Credit, similar to a credit card functioning, makes a loan available to the borrower whenever he/she needs it.
A person with bad credit history can also get a loan easily when his/her house has been put up as security.
Disadvantages of Home Equity Loan:
- When a house is put up as security, the owner gives up a share, equal to the loan amount, in house ownership to the lender.
- The prospect of the house being taken over by the lender is very real in case the borrower defaults on loan payment.
- The borrower has to pay up certain extra costs against the loan taken.
- The borrower may also need insurance to make payments in case of delayed payment due to any unforeseen problem.
Irrespective of the pros and cons, the borrower must reach a conclusion on taking a loan after taking into view each and every detail.