Home Equity Loans 101: Are They Right For You?
There are many benefits to owning your home, the biggest being that you can build equity rather than sending a rent payment to a landlord. And when you have this equity, you can access some funds in the form of loans secured by your home in case of unexpected expenses.
Of course, you shouldn’t take out a home loan lightly or on a whim. But if you do your research, understand the terms of your loan, and have a solid plan for repayment, you can use home equity loans to your advantage.
What is a Home Loan?
You’ve probably heard of home equity loans referred to as a “second mortgage.” This term is used because you are using the equity in your home as collateral for the loan, which means that if you default on the loan, the financial institution can take your home to pay off the debt in full. Home equity loans are based on the current market value of your home and the remaining balance of your mortgage. These loans usually have a fixed rate, while home equity loans have an adjustable rate.
What are the benefits of a home equity loan?
Because you’re using your home as collateral, home equity loans are a form of secured debt, while things like credit cards are unsecured. Unsecured debt has no collateral, so it generally carries higher interest rates. That means a home equity loan is likely to come with a lower interest rate, meaning your money goes further. Home equity loans have a fixed amount and come with fixed monthly payments, making planning and budgeting easier.
What about the downsides?
You should always understand the risks and terms of any debt you incur, regardless of the form. Like all loans and debt, home equity loans have some downsides that you should be aware of. For example, if you want to get a lower interest rate on the loan, you must first refinance your home, which means additional steps and costs to get the refinance. And if you default on your payments, you could end up losing your home. If your home’s value goes down, even if the cause is beyond your control, such as B. a downturn in the local real estate market, with your home being submerged. That means you owe more than your home is worth.
How do I know a home equity loan is right for me?
Every financial situation is unique, so make sure you understand your finances before seeking debt of any kind. Home equity loans cost money in the form of closing costs and interest payments, so you’ll always end up paying more than you get on the loan, but you’ll pay it off over time. You should only take out a home equity loan if you have a solid reason that will add value down the road, such as:
As with all financial products, you should keep honest accounts of your existing finances and develop a plan for how you will use the money and how you will repay it. Keep in mind that a home equity loan could mean losing your home if you don’t. When you finally decide to get a home loan, make sure you are working with a trusted professional who has your best interests in mind. With the right information and a good plan, a home equity loan can be a good choice.
Finance FYI is presented by 1st Security Bank.
At 1st Security Bank of Washington, we take a tailored and personal approach to your financial well-being. We live in the communities we serve, so our offices offer tailored solutions for their communities. We believe that relationships make the difference and that is what differentiates 1st Security Bank.