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Home Equity Loans - What is this All About

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By : Vicki Hat    99 or more times read
Every time you pay off your mortgage, you are earning equity. The bigger your home value is, the bigger your equity will be. This is a good thing because eventually you can use your home as collateral to put out another debt that can be used to pay for many things.

This is how home equity loan works. A person can borrow money against their home equity. This means the house will be used as collateral to the loan. Here's the perfect example: you buy a house for $200,000 and you borrowed an amount of 130,000 dollars. You made a very big down payment of 70,000 dollars. The initial payment made now is considered your equity. As you pay off your debt monthly, you are slowly gaining more and more equity. That part can be taken as cash and the money borrowed can be used to pay other stuff. Of course, you would have to pay it back eventually in specific period of time with interest.

What are the main reasons for taking out a home equity loan? People want to take out this kind of debt for the following reasons:

  1. To improve the look and the functionality of their homes. Adding more value to your home is one of the most reasonable things that you can do to take out debt from your home equity.

  2. To pay off other debts, especially credit card debt, student loans and many others. This is what they term as consolidation. People do this for their convenience and to get cheaper monthly paybacks.

  3. To pay off monthly expenses that could sustain one's cost of living. True, people do fall short on cash to pay off school tuition fees, medical expenses and vacations. If you have no other sources and you fall short on cash, your home equity can be one of the answers to your problem.

  4. To buy a new home. Many people want to buy a second or third property that can be used for vacationing or for rental. If you fall short on your down payment, you can use your equity to sustain the lacking amount.

  5. To finance major purchase. Your home equity loan can help pay for a new car and other luxurious items that you’ve been wanting to have.

So should you just go ahead and use your equity for debt? It may sound a good idea but it has its own pitfalls. Before jumping into any kind of debt (not just home equity loans), you need to understand what the debt is all about and how it can affect your financial portfolio. You need to be responsible. If you fail to exercise due diligence in applying for a loan, you may end up losing your home.

Hence, you should try seeking help from financial advisers to see the whole picture and the risks involved in obtaining this type of loan. You can also ask them about their terms and the cost involved in obtaining this kind of debt.

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