Maybe you want to finance major expenses like your kids’ college education, you’re suddenly faced with large and unexpected medical bills, or you’d like to make major home improvements or repairs. A great way to get the funds is to opt for a home equity loan. Based on your credit history and your property’s loan-to-value ratio, you may be able to obtain a safe and convenient loan against your home.
What are home equity loans?
These are loans taken out using the borrower’s home equity or market value as collateral. Equity is calculated using the difference between the market value and the outstanding balance of the mortgage.
Home equity loans have recently been making a comeback after many years of scarcity in the market. For those with a good credit rating, rates are lower than with other forms of loans, such as personal/car loans or credit cards.
risks
Home equity loans can be easy to obtain if you meet the eligibility criteria and make financial sense if you have the equity, but there are several inherent risks:
• Variable or floating interest rates: could always increase in the future
• Too easy to spend: you could end up with “buyer’s remorse” after splurging on a bunch of unnecessary things
• Full Repayment – If you’re financially unsavvy and don’t hold the reins tight, you could find yourself in trouble at the end of the loan period.
• Property loss – Defaults result in foreclosure and you could lose your own home.
That’s why exploiting your home’s value can be extremely risky if you take out a home equity loan without fully understanding the process and its repercussions.
Rules
Protect yourself and your family by educating yourself before you take out a home equity loan. It could be a disaster to wait if you are not aware of the implications and repercussions.
Here are some tips to keep in mind:
behind
• Remember that it is still a form of mortgage
• Keep careful records of all refunds and charges, including account statements, bank records, canceled checks, etc. so you can dispute inaccuracies with solid evidence.
• Read the loan agreement very carefully.
• Never hire unlicensed contractors to work on your home.
• Use the loan amount to make genuine improvements to your home or any specific purpose for which you have taken out the loan.
• The loan amount can be used to overcome unexpected events/crises if you do not have an emergency fund
• Can be used to build a retirement savings nest
• Check if tax benefits or deductibles are available
not to do
• It’s tempting, but never use your home equity loan to splurge on a bigger TV, boats, cars, cruises, vacations, etc.
• If you plan to sell your home soon, avoid taking out a home equity loan.
• Don’t take out an unnecessarily large loan, keep it realistic. If the market falls, you could be caught in a massive redemption situation
• Don’t be pressured by strong marketing tactics: educate yourself and be informed
• Consult your family before taking out a loan
• Never sign documents that have blank spaces or one that you have not fully read and understood.
• If necessary, have the documents verified by an expert
• Evaluate your ability to pay and judge if you can really afford it
Today, interest rates are at an all-time low and the economy is improving. Many homeowners are considering getting a home equity loan, and in fact, it’s a great option if you have the credit rating and eligibility. Also, if you have also fully weighed the risks and benefits, approached a trustworthy, well-established and reputable institution or organization and conducted good research.
