Affordable Finance Options – Home Equity Loans
Home equity loans can provide homeowners with a wonderful way to get their hands on cash when a situation arises and they need to borrow a significant amount of money. Homeowners can either choose to take out a home equity loan that would provide them with a lump sum loan amount, or they can choose to create a home equity line of credit. Both of these types of loans use the unencumbered value on the property as security.
Because equity loans are secured against what the lending industry considers to be the best and most stable type of asset a person can have, their home, the interest rates are lower. In general, the only loans that will carry a lower interest rate are original mortgages. Depending on the market, and the terms of the original mortgage, people can still walk away with a home equity loan that is at a lower interest than their first mortgage home loan.
Home equity loans are generally widely available to all homeowners, even to those who have had some negative marks on their credit reports and need to seek out bad credit loans. When evaluating a borrower for a home equity loan, the most important thing to the lender is how much equity there is in the home.
Secondly, a lender that offers equity loans will also look at the condition of the house to be sure that it has not undergone some type of damage that would lessen the value, and therefore reduce the amount of equity in the home. They will also require the property to have a current appraisal to determine how much the home has appreciated since the original home financing was done and to understand the market trends.
But, equity loans are not only approved on the basis of the equity in the property, the condition of the home, and the real estate market situation. The borrower must also be able to prove that they have the ability to make the payments on the loan as well.
In the case of a homeowner who has a good deal of equity in their home, but is unemployed or unable to work because of illness, it might be difficult to secure any equity loans. If they do, the interest rate will probably be very high because part of the calculation on loan rates includes the risk of the borrower defaulting on the loan.
This brings up an aspect of equity loans that some people will overlook, especially if they have difficult financial circumstances to deal with and are almost desperate to find a way to borrow money. The problem is that borrowing against the equity in the home puts the home in jeopardy of being lost to foreclosure.
Many people think that as long as they are making the payments on their original mortgage home loan that their home would not be in peril from equity loans which are “second mortgages” or in “second position.” But if the borrower is not able to make the payments on the equity loan, then the lender can start foreclosure proceedings. There have been instances where people who were struggling to meet their monthly obligations failed to make the payments and ended up losing their home because they were unaware of this danger.
With that word of warning in mind, home equity loans can still be the best option for people who have damaged credit and who also have the ability to repay the loan. The lenders not only have their loan secured against an asset that is growing in value, they also know that most people will do everything in their power to avoid losing their home, so the risk is lower and therefore, so are the interest rates.
The bottom line is that home equity loans can be a very good loan vehicle for people if the loans are taken out with a clear understanding of the terms and conditions. As a bonus, not only are the interest rates very favorable, but the interest that is paid on these loans is tax deductible if you itemize your deductions.
By The Money Manager
