Do you need cash to consolidate debts or to finance your family members’ college education? Are you having difficulties looking for additional cash to augment your income or to fund unforeseen needs? In times like these you may be thinking you have nowhere else to turn to. But if you own your house and property, you may be practically sitting on top of an asset that can save you. You may be thinking that selling your house is definitely out of the question. But who said anything about selling, anyway? The unencumbered value of your house, or its remaining value after you deduct the mortgage you are still paying, is what can save you from financial problems. This can be achieved through a home equity mortgage o home equity loan.
Home equity loan is a type of loan where the borrower uses the equity of his property as collateral. The equity is defined as the difference between property’s fair market value and the unpaid balance of the mortgage. For example your house is worth $150,000 and you still have $75,000 in unpaid mortgage, then your property’s equity is pegged at $75,000. This means that lenders will be willing to grant you a loan for an amount equivalent to $75,000. The value of your equity also increases as you pay your mortgage. Thus, if your mortgage payments are up to date, you can easily apply for a loan for a larger amount of money that is almost equivalent, if not equal, to your property’s value.
Of course, availing of a home equity mortgage or loan has its pros and cons. And before you get all too eager about applying for a home equity loan at your financial institution, it is best if you know what you are getting into and if home equity loan is indeed the right thing for you. Maybe the most obvious advantage of a home equity loan is that it is relatively easy to qualify for one, even if the borrower has bad credit. Most lenders and financial institutions consider home equity loans as relatively safe, because your property is your collateral and you can’t just disappear with your house if you defaulted.
Another advantage of a home equity loan is that you can use the loan amount for any of your financial needs, either for funding a college education, financing a house repair, getting quick cash for a medical emergency or to alleviate debt. Home equity loans can also provide you a bigger lump sum amount compared to other loans, depending on the equity value of your property. This makes home equity loans a great option for those in need of a lump sum amount in the short-term but with long-term rewards. Another advantage of this type of loan is that the interest paid on the loan is tax-deductible. However, the tax-deductible portion is only based on a certain percentage and this may mean nothing at all if you are in a high-income bracket.
More importantly, home equity loans also have its drawbacks which you must be aware of before getting into a deal. Because home equity loans are similar to a new mortgage for your house, failing to meet the payment schedule can lead to defaulting and the lender or bank can foreclose your house as a consequence. Thus, if you are not sure of a steady income that will allow you to pay off this loan, you may stand the risk of losing your home. That is why getting a home equity loan is a risky proposition for people who are having financial problems or are contemplating a career change. A house may be their only asset and putting it on the line can be very risky. Another disadvantage is if the value of your property drops for some reason. You might end up owing more than what you property is worth.
Yes, home equity mortgage can save you. But if you plan to get one, you should not treat it as a ‘quick-fix’ solution to short term financial needs but as an important financial decision. You have to make sure that getting a home equity loan is the best thing to do. You can consult your tax advisor for recommendations and guidance. You should also carefully consider your financial situation before applying for home equity loan, or any type of loan for that matter.