Getting the Best Bang for the Bucks Out of Your Home Equity Loan
A home-equity loan facilitates a homeowner to have money by pulling the equity of her or his home. Even if the sum borrowed is $50,000, the owner can remove all the interest at the time of filing the tax returns. Moreover, such loans act as a convenient source of cash, as the interest rate is lower than that on credit cards and other loans although higher than first mortgage. Most people take a fixed-rate equity loan to repay their credit card debt. Therefore, such loans act as debt consolidating tools that offer the tax and low interest benefits. For a lender, home equity loans are quite beneficial, as they earn significant amount of interest and fees.
Types to Consider
There are two varieties to consider namely, Lines of Credit and Fixed-rate Loans both available for a term ranging between 5 and 15 years and with a clause to repay in full in case the home is sold. As the name suggests, a fixed-rate loan features a single payment that is repaid over a fixed time at a set interest rate. Both the rate and payment tend to remain constant over the duration of loan.
On the other hand, a home-equity line of credit works almost like a credit card loan. Herein, there is a spending limit, and that a borrower can withdraw money in need through a designated check or credit card. Unlike the fixed-rate option, the monthly payments differ according to the money borrowed as well as the ongoing interest rate. However, the term is fixed like in case of fixed-rate loans, and when it is over, the remaining amount needs to be repaid.
Ideal Use of the Advance
Home equity loans prove to be very beneficial for sensible borrowers. If the borrower has a proper and reliable means of earning that can justify the ability to repay the loan, the tax benefit on paid interest and low interest rate together make up a sensible package. If you choose a fixed-rate option, it can help you meet the cost of a single, big expenditure such as kitchen remodeling or bathroom fixtures. On the other hand, the line of credit option acts as a convenient way to meet recurring or short-term expenses such as education fees.
Know the Downside
The main con of a home-equity loan is that it appears to be an effortless tool to a borrower who is already seized into a lasting cycle of spending and borrowing. This is known as reloading wherein the borrowers are habituated to take a loan for only clearing their existing debt and spend the remaining in extra purchases. Such a habit results in an escalating cycle of debt due to which borrowers turn to equity loans providing 125% worth of the borrower’s home equity at higher fees. Such a loan has no collateral and that the interest paid on the part above the home value is not subject to tax benefit. If you feel that this loan is appealing, it is actually time to stay away due to high interest and fees that can finally lead to bankruptcy.
Another con of the loan is to fund unnecessary home improvements. While having kitchen or bathroom remodeling is essential for adding value to your home, channelizing the loan towards having a swimming or terrace does have significant value of resale.
Bio: Smith is a freelance writer who loves to write on topics related to finance and health. He is researching on topics related to stock markets and loans. Currently, he is reviewing a Singapore loans site that appears to be quite reliable.
Share this:
Category: Loans
