Home equity loans are a great way to finance the purchase of a home, but they can also be extremely dangerous, especially if you don’t know what you’re doing; a home equity loan is essentially borrowing against the equity in your property as well as your remaining mortgage balance- these loans can be a great way to fund large home improvements or pay for repairs that will prevent you from being able to sell your home for top dollar in the future.
It’s important to understand what you can get with a heloc and how extensive these loans are because cash-strapped residents frequently abuse them by taking out sizeable sums of money from their homes with little security and extremely high-interest rates- in this article, we will go over everything you need to know about getting a home equity line of credit.
What is a Home Equity Loan?
The loans are a type of unsecured loan that allows you to borrow money against your property’s equity, including the outstanding mortgage balance, although they are not adjustable-rate loans like ARMs, they are still subject to interest rates above the current prime rate because they do not require mortgage insurance, which can result in significantly higher APRs.
Home equity loans can be used to finance house purchases, home improvements, business expansion, family emergencies, or medical costs, among other things, however, cash-strapped locals frequently abuse them because they are unaware of their ability to withdraw sizable sums of money from their homes with little security and extremely high-interest rates.
You cannot walk away from a home equity loan if you can’t pay it back, unlike a mortgage, and if you don’t make loan payments, the bank can take your home by suing you for the difference, if you default on a home equity loan, the lender may also foreclose on your home and sell it to recoup the loan- home equity loans do not have the same financial protection as mortgages do.
How Does a Home Equity Line of Credit Work?
A home equity line of credit HELOC gives you the ability to access a portion of your home’s equity without taking out a separate personal loan for it, you can use the funds from your HELOC to finance home improvements, to pay for another person’s medical expenses, or for any other purpose that doesn’t fall into the category of essential, you can even use it to pay off credit card debt.
There are several pros and cons to the HELOC. On one hand, it is easy to access the money at your discretion, which can be helpful when you need cash to cover an unexpected expense, like a repair or medical bill, on the other hand, it is risky to access the funds at will because there is no security on the money- you could get into major financial trouble if there is a major economic shock, or if you have to suddenly drop your expenses.
Things to Consider When Getting a Home Equity Loan
There’s a distinction between leveraging your home equity and taking out a loan from it, it includes the mortgage balance and any accumulated property equity; property equity loans are used to pay off debt or make home upgrades- when you borrow against your home’s equity, you reduce it, they are risky and generally unwise, they feature high-interest rates and might tempt cash-strapped homeowners to borrow huge sums without collateral.