What is Meant by a Home Equity Loan?

A home equity loan takes into use the equity in your home which is basically the distinction between the current market value of your home and what you owe on your mortgage as the collateral for your loan. The loan amount just like a regular mortgage is disbursed in one lump sum that you will be required to pay back in equal monthly installments over a fixed period of time which is usually five to 30 years at a fixed rate of interest.

Although amounts may be different from one lender to another, most lenders allow you to borrow up to 75% to 85% of the current equity of your home. The amount you qualify for along with the interest rate you will be required to pay will typically be dependent on your payment history and credit score.

Home equity loans facilitate you to make use of the cash for a massive array of reasons, such as starting a business, paying medical bills, funding your education, consolidating, or paying off credit card debt. But, if you make use of the money for purchasing, building, or substantially improving your home, you will be capable of deducting interest paid on the loan on your taxes.

You may opt for deducting interest on up to $3,75,000 for a married taxpayer, or $750,000 of qualified home loans by filing a separate return based on the IRS. However, these limits are set for the sum of your regular mortgage in addition to your home equity loan. So, if the total amount you borrowed exceeds $7,50,000 or $3,75,000 in case you are married and file separately, you will not be capable of deducting all the interest you paid.

Pros of a Home Equity Loan

A home equity loan besides the flexibility in making use of your loan along with the possible tax break or interest paid may also serve you with a plethora of other benefits.

Fixed Interest Rates

The rate of interest on a home equity loan is constant for the life of the loan. So, even if your rates move u and down in the market, you will get shielded from those changes. A fixed interest rate removes the stress of concern about changes in the market and how it may impact your loan year after year.

Your Payments will not Change

As the rate of interest on your loan will not get changed, the monthly mortgage payment will remain similar for the life of the loan. This in turn makes it much easier to budget for your expenses each month and over the long run.

Lower Rates in Comparison to Other Loans

As home equity loans are secured by your property, these typically facilitate a lower rate of interest contrary to unsecured forms of borrowing, for instance, credit cards or personal loans. While you may opt for paying closing costs or any other kinds of fees, it is an inexpensive alternative for an unsecured type of loan.

Long Timelines of Repayment

The terms of repayment on home equity loans might be as long as 30 years. It also comes with a lower rate of interest contrary to unsecured loans, that in turn becomes the reason for a highly affordable monthly repayment installment.

Potential Tax Benefits

If you are interested in taking out a home equity loan to make a home improvement, then it is a matter of fortune for you. If you make use of the money for substantially improving the property that is taken into use for securing the loan, the interest paid on your home equity loan might be tax-deductible. As there is some kind of limitations on what you may deduct, it would always prove to be best for you to consult with your tax advisor.

Cons

The Chances of Losing your Home
If you get failed in paying your home equity loan, your financial institution would take your home under its own acquisition.

The Potential of Owing More than its Worth

A home equity loan takes into consideration the current value of your property. However, the value might go down if the housing market crashes in your nearby areas and become less desirable. If the value of your home declines, you could owe more on your house contrary to its worth, that in turn makes it hard for selling.

Credit & Equity Necessities

However, it is true that home equity loans generally facilitate lower rates of interest contrary to unsecured loans or credit cards, the most competitive rates will be awarded to borrowers who are having good to fantastic credit. Likewise, generally, there is a necessity of having between 15% to 20% in equity in your home for qualifying for a home equity loan.

Take Away

Home equity loans may prove to be a useful option if you are aware of how much you are desired to borrow and how much amount you would be more comfortable with a fixed monthly payment along with a fixed rate of interest contrary to a variable rate. However, you must carefully take into consideration whether you are comfortable making use of your home as collateral before proceeding with this kind of loan.