Do You REALLY Need a Home
Equity Loan? |
By William McNutt |
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Your equity is the amount your home is worth, on the market, minus
the amount you owe to your mortgage broker. For example, if your
property is worth $200,000 and the balance you owe your mortgage
broker is $100,000, then your home equity - the part of your
property that you own free and clear - is $100,000.
A
home equity loan is a loan that uses the equity in your home as
collateral. That means you are using your home as a guarantee
that you will repay the loan. Before you even consider borrowing
against your home equity, you need to understand that a home
equity loan reduces your home equity by the amount of the loan
and that if you do not repay the loan, you could lose your
house.
These loans have advantages and disadvantages
compared with other kinds of borrowing. You should consider the
"Pluses" and "Minuses" of borrowing against the equity in your
property before apply for a equity home loan.
Pluses
*The interest paid on a home equity loan is tax-deductible, just
like the interest on your mortgage. This of course is not the
case with credit card interest.
*Equity home loan rate
may be lower than other kinds borrowing, such as credit card
debt, because you're using your property to guarantee the loan
will be repaid.
*A home equity loan gives you a source of
funds for important big purchases: a college education, home
improvement, a medical emergency, or other emegencies that may
arise.
Minuses
*Your payments on your home
loan must be met or you could lose your home.
*Often you
will have to pay closing costs, which can be substantial, this
is money which will not be recoverable and will diminish your
loan value.
Having excess equity in your home will make
you a target of unscrupulous sales tactics designed to get you
to rush into an expensive loan you may not need. If you feel
like you're being pressured to borrow, just say no - always take
your time when you take out a home equity loan.
There are
reasons that make a home equity loan a good choice but also
reasons that are not good. You should consider them wisely.
Good reasons to take out a home equity loan.
Improving your finances - A home equity loan can consolidate
your debts, by paying off high-interest credit cards or other
high interest loans which are not tax deductible.
*Investing in your home - You can use a loan to increase the
value of your home by using it for needed home improvements or
repairs.
*Investing in your future - Home equity loans
can help finance an education or start a business.
Bad
reasons to take out a home equity loan.
*Spending the
money on luxury items - Don't risk your house to buy that new
car, big boat or take an expensive trip. You should save until
you can afford it.
*Using the money for living expenses -
If you're spending more than you're earning day after day, a
loan will only delay the "inevitable." Try to find ways to cut
your expenses instead. A credit counselor can help.
*Loan
the money to a friend or relative - Remember, it's your house
that's on the line. Don't let a friend or relative pressure you
to take out a loan for them. If they don't pay you back, they
lose nothing - but you could lose your home.
If you're
thinking about taking out a home equity loan as a last resort to
get out of serious financial trouble, DON'T. Chances are,
you'll just run up your debt again and will soon be just as bad
off as you are today, and possibly lose your home as well. Get
help instead! A credit counselor can help you improve your
finances at little or no cost to you.
This article may be
freely distributed and reprinted as long as the author's
information and web link are included at the bottom of the
article. For more info
Copyright 2005. William McNutt.
All rights reserved |
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