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As home values rise, more owners are now considering borrowing against their home equity via a loan. In other words, if your home is worth more than you owe on it, a home equity loan can provide you with funds for anything you want, and we are not just talking about home-related expenses. As you continue reading, you will be able to learn more on some advantages and disadvantages of home equity loans, which will further help you decide if this type of mortgage financing is right for you.
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What is a Home Equity Loan?
Home equity loans allow a borrower to acquire a new loan on an already mortgaged property using the equity he/she built as a collateral. In other words, home equity loans are based on borrowing against one’s home equity. These loans are typically reserved for those looking to pay down medical or consumer debt, start a business, or pay tuition.
Who qualifies for a Home Equity Loan?
To receive a home equity loan, a borrower must be able to demonstrate the ability to repay the loan. In addition, while lenders are required to conduct an appraisal of your home and run a title search to verify any existing liens or debts secured by your property, you'll need to provide proof of income, access to tax records, and more. Typically, home equity loans require good credit history.
Pros of a Home Equity Loan
Low Interest Rates
One of the great benefits that comes with home equity loans is a lower interest rate. An annual percentage rate, also known as APR, is significantly lower on home equity loans in comparison to unsecured loans such as credit cards and personal loans.
As mentioned before, a home equity loan can be used in numerous ways – whether you are looking to start a business, pay medical bills, or anything else. Being delivered as a lump sum, a home equity loan becomes quite a convenient option for financing different things.
Large loan amounts
Depending on one’s home equity, a borrower can qualify for relatively large loan amounts through home equity loans. These types of loans present a primary funding option for large expenses such as home improvements, higher education, or starting a business.
As home equity loans are fixed loan amounts with a fixed interest rate paid back over a fixed period of time, there are no unpredictable interests coming your way.
Cons of a Home Equity Loan
Using home equity as a collateral can be risky in case of failure to repay through fixed monthly rates. In these instances, the bank can take your property, sell it, and recover any unpaid funds by foreclosing on your home.
Closing a home equity loan typically costs up to 2-5% of the loan. The typical fees included in your home equity loan closing costs are attorney or title company representative fees, a title search, document preparation, an application fee, and an appraisal to evaluate the market value of your property. The best way to know exactly what your closing costs will be is to ask your lender for an estimate.
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