Home equity loan provides homeowners the option to utilize their equity to invest it on other things. Basically, it is a debt. One can withdraw money equivalent to that of their equity and use their homes as collateral. Then they can pay back what they have borrowed over time with interest but with several tax advantages.
Many people have found home equity loans very useful to finance their major purchases or to pay off other debts. However, the use of this kind of debt is not limited to the aforementioned. It is a very useful tool to sustain your cash needs and can be very helpful during times of crisis. But one has to have the capacity to payback what was borrowed or in the end, one’s home can be foreclosed.
Here are some of the specific reasons why people opt to get home equity loan:
1. They want to improve their homes but they have no extra cash for the meantime. It is the best option to use when you have to overhaul the house especially if big problems are recurring and has put your family’s health and safety at risk.
2. They want to pay off their medical bills. Some people may have trouble paying off their hospitalization because of the gravity of one’s illness. Just to be able to get out of the hospital and go on with one’s normal course of life, equity can be taken out as cash to settle the bills.
3. They want to consolidate their debts and pay a smaller interest rate. Some people may have been burned with paying off their loans from different lenders. And some aren’t too happy with the amount they are paying because of their interest rates. Hence, consolidating debt can be done by simply taking out cash from your equity and pay them off from one single lender.
Those are just some of the examples of home equity loan. However, before embarking in this kind of loan, it is best that you seek financial advice from the experts. True it is very attractive for many people and considering the low interest paid is tax deductible, everyone can really be drawn to this kind of debt.
Remember, this kind of loan uses your home as collateral. If you are in deep financial trouble, you may want to think twice or even thrice before getting this kind of loan. You also have to check the trends of the market. If you draw 80 percent of the equity of your home (which is the allowable value), and the house values continue to drop, you can end up owing the bank more than the value of your home.
Home equity loan should be used when you have a steady job, if the real estate market shows some stability and if you can afford the additional cost considering your existing monthly expenses. Be smart and do not abuse such privilege. If you are in doubt, again go back to your financial advisers; talk out the risks and effects of the loan to your financial health.