What is an Equity Loan?

By Albert B. — Published February 12, 2018

What is an Equity Loan?

Most of you may have a dream of owning a house, but bad credit scores and financial liabilities often come in your way. Even if you manage to get the ownership of the house, you need money to maintain it. Expensive repairs and re-installments can simply be a huge burden on your financial resources. But don't worry, there's help- equity loans.

For those of you who don't know, equity loans or home-equity loans is a type of debt that allows homeowners to take a loan against their home's equity. The equity or value of your home is the difference between the worth of your home and the amount of mortgage debt you still have. Equity loans provide homeowners access to finance more conveniently compared to other forms of loans. This is primarily because your house is used to secure these loans.

If the worth of your house is more than your mortgage debt, you can apply for a home equity loan. It's a type of second mortgage loan. The first loan being what you opt for while purchasing the house. You can apply for additional loans by mortgaging your house if your house has increased in value. Homeowners can apply for an equity loan for almost any purpose. Since these loans provide lump sum money, homeowners can use equity loans to meet on-time, large expenses. These include:

• Making home upgrades and repairs, and undertaking massive remodeling projects.
• Paying off credit card debt.
• Paying for tuition fees of the kids.

Benefits of equity loans
Equity loans provide a range of benefits to both lenders and borrowers.

• Low interest rates
The interest rate for equity loans is usually quoted as APR and is much lower than personal and credit card loans. A low rate of interest often means low cost of borrowing.

• Easier loan approval
Equity loans are good for bad credit customers also because they are easier to get approved. Lenders often find a way to mitigate risks since the loan will be secured by your house. This makes it necessary for homeowners to adhere to documentation norms.

• Possible to get large amounts of money
Borrowers of equity loans can apply for a large loan amount, provided they have enough equity. Equity loans are, therefore, great for meeting large expenditures, such as home improvements, starting a new business, and higher education of kids.

• Tax benefits
If you can show that you are paying interest on a home-equity loan, especially for the purpose of making “substantial improvements” to your house, you can claim a tax deduction.

Most of the benefits provided by equity loans mostly root from its safety. Lenders find it a safe lending option because these loans can be recovered by selling the mortgaged house. Borrowers also strive to make payments regularly for the fear of losing their home to the bank.

Choosing between equity loan options
Home-equity debt is of two types: home-equity loans and home-equity lines of credit (HELOCs). Home-equity loans are fixed-rate loans where a person borrows a lump sum amount of money and repays in monthly installments over the loan's term. On the other hand, home equity lines of credit involves a variable rate of interest. Homeowners can borrow money only when they need it and have the option to make the payment more aggressively or on a minimum interest basis.

Home-equity loans are perfect for people who wish to invest in a big-shot project or seek debt consolidation because they have stable rates of interest. A home equity line of credit is best for people who deal with huge payments. Both types of equity loans have an average repayment tenure of fifteen years. Makes sure you analyze your financial position and needs carefully, and apply for an equity loan.

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