You may have substantial equity in your home and be thinking about the different things you should be doing to improve your financial situation. A home equity loan can be a way to have access to cash for home improvements, debt consolidation, or for other necessities.
No matter how much you could use the extra cash for situations or emergencies, you should think twice before considering a home equity loan.
What Is a Home Equity Loan?
A home equity loan enables homeowners to borrow cash while using their residence as collateral on the loan. Home equity loans are essentially a second mortgage. Banks usually consider these types of loans as low-risk. If the borrower defaults on the loan repayment, the home will go to the bank.
There are a few advantages to home equity loans. Typically, borrowers can access a large amount of cash at one time. The interest rates on home equity loans are generally lower than other loan types. Borrowers who have some credit mistakes in their record can still qualify for home equity loans. Home improvement, repairs, school tuition, and consolidation of existing debts are the main reasons homeowners will seek home equity loans.
The Downside and Dangers
While home equity loans do have advantages other loans may not, the risks associated with these loans can be devastating to the entire family. Defaulting on this loan puts your home at risk. Since your home is used as the collateral on the loan, not keeping up with payments can cause you to lose your home for good. The bank will need a way to recoup their money, and selling your home will be the way to do it.
For the borrower, that means you and your family can be out on the street. It will be essential that you do the math on the loan to ensure repayment will not be an issue. If you have spent years building up the equity in your home, you can jeopardize all of that hard work should your financial situation take a turn for the worse.
A lesser discussed danger of home equity loans concerns situations where borrowers go outside of their bank to get a loan. A lot of home equity loan scams have come to light in recent years, but by no means does that make things safer. There are still individuals and companies looking to make a buck off of you in a less-than-scrupulous manner. Many homeowners have been in a hurry to get access to money only to be taken advantage of with a loan that costs more than they can afford.
How to Find the Right Loan Package
You can avoid scams and find the best loan terms by doing some research before you take a loan. While money issues can be pressing, it is vital to take the time and make the effort to consider your options.
Start at your current bank where you have your mortgage or maintain your accounts. See what they are offering and then go online and compare your options. You want reasonable terms for repayment, a low interest rate, and assurance that the loan is on the up and up. If you look outside of traditional banks, make sure you do not fall victim to the pressures of salespeople pushing loans on you. Get everything in writing and make sure the terms are legitimate.
Before going for a loan, make sure your credit history is correct and in good standing. Order a copy of your credit report prior to applying for a loan to make sure your history is accurate. Correct any mistakes noted on the credit reports so your credit status will be as good as possible when reviewed by a lender.
Home equity loans are not inherently bad. You can successfully utilize a home equity loans for things you need and to pay off your debts, but proceed with caution. Remember that you are putting your home on the line and financial mistakes can be incredibly costly in the long run. If you are in need of upcoming home repairs or other expenses, work on setting aside cash in an emergency fund for future incidents. This can help you prevent having to seek out loans for things you need moving forward.