What’s a home equity loan and how can it help my finances?
Homeownership is a lot of hard work. It requires time, patience and diligence to pay for and maintain your dream home. It also, however, has a lot of perks.
Your home is a place of your own. It’s a respite from life’s daily hassles, a place for family to gather, and — believe it or not — a source of cash when you’re in need.
If your home is worth more than what you owe on your mortgage, a home equity loan could help you achieve a number of your financial goals.
Let’s start with the basics.
How does a home equity loan work?
You can apply for a home equity loan once the value of your home becomes greater than the amount of money you owe on it. These loans tend to be easier to be approved for because your home is the collateral.
Once you are approved, you have a few options. You can take a lump sum of cash and repay it, with a set interest rate, over an agreed upon amount of time. You can also be approved for a home equity line of credit, which offers a set amount of money you can use. You don’t have to use it all, but you do have to repay it in a set amount of time and interest rates will likely be variable. Some banks also offer home construction loans, which allow you to take out equity to pay for remodeling or home construction.
What are the risks?
As with any type of loan, there are some risks with using home equity.
If you fail to make a payment, your largest asset is on the line. And you could end up forgoing other bills — and racking up interest — to keep your home from being foreclosed. Furthermore, your interest rates could vary throughout the term of your loan based on who you’re borrowing from.
Ultimately, you’ll want to research how much you need to borrow, if you can afford to pay it back in time, and who you want to borrow from.
What are the benefits?
Home equity loans, when used wisely, offer a number of benefits.
First, they’re easy to obtain. As long as your home value exceeds the amount you owe on it, you’re likely to be approved. Your FICO score doesn’t need to be stellar, and your personal finances don’t play a huge role in what interest you pay. And that interest rate is almost certain to be lower than other types of loans or credit cards.
Second, home equity loans are typically larger than most loans because they’re based on the value of a home.
And finally, they can serve a diverse range of needs. Whether you need a car, to send your kid to college or to remodel your home, a home equity loan can help you without trapping you into debilitating interest rates.
If you think a home equity loan could help you achieve your financial goals, Mountain America Credit Union can help. We offer simple one-time and two-step closing options, low rates and flexible terms that will help you get where you need to be.