Jun 9, 2017

What Is A Home Equity Debt And How Can You Make It Work For You

A home equity loan allows or gives the leverage to borrow money using your home equity. Capital termed as Collateral is the property that you pledge as a guarantee. It helps to repay the debt within stipulated time. This particular period of repayment gets fixed by the financial body or the group of Financiers. With a Home Equity Loan, you can pledge your home as a mortgage or as collateral service. There may be a chance of losing your home and you might be forced to move out if not able to pay the debt or the loan taken.

Equity Loans and lines of credit

There are two types of Home Equity Debt - Home Equity Loans and Home Equity Lines of Credit. A Home Equity Loan is a one-time lump sum amount that is paid off within a set amount of time or a fixed period. The loan owned with a fixed interest rate and the same paid back each month through affixed installment method. Once you get the money, you cannot borrow further from the loan. On the other hand, a Home Equity line of Credit works more like a credit card through reducing balance method. It allows you to borrow up to a certain amount and repay within a particular time or time limit set by the lender. During that period you can withdraw money as needed and as you pay off the principal, you can again use the credit facility.

Why are they popular

In today’s world, Home Debts are more attractive and convincing as it helps in securing your home under collateral packages. Comparatively, the interest rates of Equity Home Loans are lower than those of Auto Loans, Consumer Loans, etc. Home Equity loans and lines of Credit have become increasingly common as the property values have gone up and homeowners have learned about managing their debt. The reasons for being popular are the attractive rates of interest and tax deductibility. In the early 21st-century, mortgage rates were being dropped and property values were up for millions of homeowners. But, now with the modern laws in place, things have drastically changed for betterment.

Benefits for Consumers

Home Equity loan provides an easy source of cash. Obtaining one is a very simple process and can be achieved by many consumers as it's a secured debt. The interest rate on home equity loan is higher compared to the first mortgage loan. On the other hand, it’s much lower compared to the credit cards or the auto loan and any other consumers’ loan, etc. Interest paid on a home equity loan is also tax deductible as noted earlier. So, by consolidating debt with the home equity loan, consumers get a single payment at a lower rate of interest and tax benefits as well.

Advantages for Lenders

A creditor’s dream can now turn into reality as he gets the opportunity to earn interest and fees on equity loans in addition to the benefit of the borrower’s primary mortgage. In the midst of the term, if the borrower turns defaulter, the lender gets the opportunity to keep all money made on the primary mortgage. He also gets the chance to keep the money earned on the home equity loan. Above all, the financier gets the opportunity to repossess the property and sell it again. So, the lenders may check online to make it a secured loan, which can be more advantageous than a typical unsecured or personal loan.

No doubt the craze of loan consolidation is increasing day by day. Thus, it is a wise idea to learn about it and go for it when needed in order to make life simple and easy. 

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