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What is a home equity loan and how does it work?
What is home equity?
Home equity loans lenders base loans off of built equity. Equity is calculated by determining the fair market value of a home and subtracting the outstanding debt (mortgage) still owed on that home. An example, if your home is appraised for a value of $180,000 and the amount still owed on your home loan is $155,000. Then the equity you’ve built on your home is $25,000.
Appraised Value $180,000
Debt - $155,000
Equity $25,000
Home equity loan lenders then determine your loan based off a percentage of this equity.
What are the pros of a home equity loan?
Home equity loans and equity line of credit loans have several benefits. It can be a source of much needed funds for emergencies, home improvement projects, car loans, student loans and other financial needs. The loan can be finished in a short time frame with the entire loan process taking as little as two weeks. The interest on a home equity loan can be tax deductible up to$100,000. Also the interest rates on home equity loans are often less then other types of loans or lines of credit.
What are the cons of a home equity loan?
The collateral you are putting up for your home equity loan is your home. If you can not repay the loan, the lender has the ability to foreclose on your home. Meaning your house could be sold to pay off your debt. Using the equity on your house is a huge decision and should be based off careful planning and deliberation. As in all loans, you are borrowing against the future and entering into a long-term obligation that can strain your resources for years to come.