Arm Loans: What is A Home Equity Loan?

A home equity loan is a one-time lump sum credit a homeowner can acquire by placing their residence as the guarantee for payment. This type of credit is most appealing to consumers who may have poor credit standing, but need a large amount of money. Aside from these benefits, the borrower gains a lower interest rate and the possibility of tax-deductible interest.

Why do lenders offer large amounts and charge lower interest rates? Because lenders understand that most homeowner debtors diligently pay their loans rather than risk losing their homes. Besides, the borrower cannot tuck the house away or conceal it.

The three biggest advantages a home equity loan offers are:

Large Loan Amount

The borrower can obtain as much as 85% appraised value of their home, minus the unpaid mortgage payments owed on the first mortgage. However, there are other factors as well that the lender will assess, such as the borrowers’ credit standing, monthly income, or ability to pay and state of unsettled loans. If the borrowers’ credit record is spotty, the loan will necessarily be smaller.

Low Fixed Interest Rate & Tax-deductible .

This type of loan has a lower interest rate, in comparison to personal or credit cards loans. Additionally, a fixed interest rate assures you that the payment remains constant right until the end of the entire loan. This makes it easy to work the monthly payments into your budget. Another advantage a borrower can claim are tax deductions on the interest of the loan for as much as $100,000.00. However, do not assume that the advertised APR (annual percentage rate) is the real rate. Ask and shop around.

Ease of Use

The one-time release of the entire loan will enable the borrower to consolidate existing debts, pay for home improvements, or use the amount for emergencies, or any big-ticket items.

The two real disadvantages are:

Home Foreclosure

If you default in paying the principal and interest fees for the loan, you will lose your home. This is certainly not the ideal type of loan for a couple who might use their retirement money to bail themselves out of the difficulty, or first time homeowners, who are inexperienced in handling finances. That is why, when you negotiate with the lender, you should ask about the penalties attached for late payments, as well as the conditions in defaulting payments and have all your agreements documented.

Long Term Repayment Period

The convenience of repaying the loan, which can vary from a 15 to 30 years period, is ultimately more expensive, because you are taking longer to pay. Another negative possibility is, if the real estate market bottoms out, you will be paying for a house which is worth a lot less. This could spell disaster especially if you are intent on selling the house. On the other hand, you are required to pay the remaining loan balance if you put the house up for sale.

Given what you now know about home equity loans, become a more prudent borrower. Carefully consider why you need the loan and if you can comfortably meet the monthly payments. Then educate yourself on the options that will best serve your financial needs and still leave you with your home.