Is a Home Equity Loan Right for You?

Dreaming of that long-awaited vacation in the south of France? Or more practically, do you need to finance your daughter’s grad school and replace your aging furnace? Many Americans are choosing a home equity loan as a way to produce cash for luxuries and/or necessities. Some use this option to reduce or eliminate credit card debt.

Whatever your reasons, a home equity loan is an attractive lure. It’s just the ticket for some of us with the need for a large sum, but is not right for everyone. Before deciding if this is the right choice for you, consider some of the pros and cons.

Factors to consider include understanding the process, your reasons for taking the loan, your financial health, your ability to repay (including those home equity loans that build in the last payment as the largest), and the time and thought involved in thoroughly understanding the commitment you make to repay the lender.

First, you should make sure you understand exactly what the home equity loan process is all about. Simply put, this loan comes in one of two ways. Either an institution lends you a large sum of money (sometimes called a second mortgage), once, or it provides you with a home equity credit line. Whichever your choice, the home equity loan is borrowed against the collateral of your home. Collateral refers to what your home is worth according to its market value, after what you still owe on your mortgage has been subtracted. Many lenders have worksheets available to help figure exact assets as well as costs.

Once you receive the loan, you’ll soon begin making monthly payments that include either a fixed or adjustable interest rate. A good thing about this interest is that “Interest rates on home equity loans are fairly reasonable, although they are a bit higher than first mortgages” (“Home Equity”). Another bonus here is that you’re not required to pay taxes on this interest. In fact, “home equity loans offer significant tax savings due to the fact that the interest paid on a home equity loan is tax deductible” (“Home Equity”).

A lender will investigate your credit history, debts, and your income, which will all probably affect the terms of the loan. A crucial step for you is to take a careful (and honest) look at exactly where you stand financially, and thoroughly identify your assets. What, precisely, is your financial situation? Are you reasonably certain of your financial security? Will something as simple as an adjustable interest rate make your payments more difficult? A caution here: missing a payment or two can mean serious trouble.

Watch out for “balloon payment” options, where the final payment is the biggest. Some homeowners are required to find another loan to finance this payment, leading to more debt. Remember that trouble to your credit rating results from not being able to make your monthly payments; missing a payment or two can even threaten your home. Obviously, these threats shouldn’t be taken lightly. How much are you willing to risk?

If you have decided a home equity loan is right for you and are ready to proceed, one caution is to be choosey when it comes to lenders. The Federal Reserve Board warns, “Shop for the credit terms that best meet your borrowing needs without posing undue financial risk.”(“What you should know about home equity lines of credit”). If your financial situation is at all in question, be careful. There are, as in any business enterprise, disreputable lenders who have devised ways of taking more of your money. The Federal Trade Commission has an excellent website that can help you to keep from becoming a target of questionable lenders, available at their website.

Research your options of lenders carefully, and remember that everybody and their brothers want to lend you money. Why? There certainly must be something in it for them, or there wouldn’t be so many companies drooling to get a chance at you. A little careful research on your part can help make sure you don’t end up the loser. Make it your choice; don’t be pressured by hard sells.

Weighing the pros and cons, then, of a home equity loan requires some time and effort on your part. The counsel of a trusted family member or even an attorney or tax adviser is always wise.
Take careful stock of where you are financially, and use solid research to make an informed decision. Be sure to understand exactly what the process entails, and research your options of lenders carefully.

And finally, a reminder from the Federal Trade Commission, “No one loan is right for every homeowner. The challenge, then, is to contact different lenders, compare options, and select the home equity credit line best tailored to your needs” (“Home Equity Credit Lines”).

Margaret S. Stone is an acclaimed free-lance writer focusing on home equity financing solutions. You can read more mortgage loan related articles at http://www.mortgageloanoutlet.com/ If you need more information or need to get more details about home equity loans and credit lines, please visit loan resources at http://www.bdnationwidemortgage.com/
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