April 3, 2021
What Are The Benefits Of Home Equity Loans?
By : Ellie Brown
Borrowing money by leveraging a home’s equity value is often referred to as second mortgage or home equity loans. The maximum amount available for borrowing depends on the difference between the existing mortgage and the home’s appraised value.
Moreover, the loan’s value depends on factors like the owner’s credit record, age, and tenure. Home equity is an owner’s share or percentage of the residence after taking the loan. For example, a house costs £200,000, and you paid thirty per cent, i.e., £60,000.
Under such a circumstance, your home equity is £60,000, and the remaining amount, i.e., £140,000, is covered through the loan.
5 Major Advantages of Home Equity Loans
● Reasonable Qualifications
Unlike other loan options, a home equity loan seems reasonable because it is provided against existing property. Moreover, banks, financial institutions, or lenders may approve the application faster than expected because of the same reason.
Unfortunately, people may also consider the same fact as negative since it acts as collateral. However, regular repayments, lumpsum money from the loan, and fixed interest rate make it a viable option.
Moreover, the fixed interest rate with this loan has a payback period of five to fifteen years. Therefore, the loan comes with an affordable repayment and structured plan. On the other hand, the variable interest rate of the same loan comes with lines of credit.
Furthermore, this loan is available against bungalows, houses, cottages and flats. Also, the owners go through a simple qualification process, as clarified earlier.
● Lump-Sum Payment
A home equity loan provides lump sum payment to the borrower for renovation, restoration, debt consolidation, college education, etc. A person can even utilize the money for covering other large expenses or recovering from existing debt.
Moreover, the lump sum payment assures regular repayments for the borrower with the fixed interest rates. Besides this, the principal amount of the loan gets covered after finishing the agreed years.
Unfortunately, a house sale would require completing the full payment of the loan. Therefore, borrowers must make sure to sustain regular income and repayments. A secured loan broker can provide the best advice on the market’s loan amount and available options.
Unlike car loans, home equity loans come with the facility of tax deduction. However, a borrower can utilize the amount only for home renovations and must have documentation.
Moreover, the tax-deductible amount would only amount to the interest paid on loan. Therefore, debt consolidation with this loan can make the tax benefits redundant. However, borrower benefits from single monthly payments and lower interest rates.
Furthermore, tax renovations include aspects covered by the government. Therefore, going through the official government website’s guidelines, choosing first direct loans, and taking advice from other enlisted lenders can prove useful.
● Low-Interest Rates
According to sources, the fixed interest rate offered with home equity loan is often lower than unsecured loans and non-promotional credit cards. However, the variable interest rate comes with a line of credit and can become highly costly.
A HELOC or Home Equity Lines of Credit provide an option for limited spending. Additionally, they offer money to the borrower through special checks or credit. HELOCs come with a money withdrawal period of five to ten years, followed by a ten to twenty-year repayment tenure.
Under the repayment period, the borrower can no longer withdraw the money from the line of credit. However, the borrower can request a lender, bank, or financial institution to convert the variable interest into fixed during this tenure.
● Viable Option for Bad Creditors
As mentioned before, a home equity loan demands reasonable qualification because it offers the home as collateral. It means the lender becomes the legal owner of th residence if the borrower fails to make repayments or abide by the decided terms and conditions.
However, lenders often do an extensive credit check of the borrower before providing the loan. Document verification is mandatory by the government. Bad creditors often have very low chances of acquiring a loan due to their ratings.
Taking this loan helps to receive a lump sum amount, create debt consolidation, and make repayments for the new and previous loans possible. Therefore, it helps to improve the credit score of a borrower.
Additionally, it doesn’t diminish the borrowers’ bad ratings by submitting multiple applications as the chances of approval increase. Unfortunately, bad creditors often face a major drawback while acquiring this loan.
Bad creditors applying for this loan often receive loans at higher interest rates than others. Therefore, it makes acquiring this loan a bit challenging. Moreover, the worse the credit rating, the higher the interest rate a borrower should expect.
Unfortunately, as per sources, lenders don’t provide loan above eighty per cent of the home’s value. Simultaneously, they even account for the original mortgage and existing application amount.
However, borrowers receive the option to choose from a range of lenders that offer debt-to-income ratio deals, great customer service, etc. The best practice would include opting for a lender that offers such benefits, fixed interest rates, and loan limits.
Make sure to avoid red flags like change in the interest rate before loan closure, enrolling personalized insurance packages, approval of unaffordable repayments, etc.