House is real property, but that does not mean that money can be used only when the property is sold. In fact, even in the case of a home loan, there are many ways to “cash out” and turn real property into movable property.
How to achieve this transformation? That brings us to a concept: Home Equity Loans.
First, you need to figure out what home equity is. Home equity is the difference between the market value of the property and the mortgage on which it is owed. It is also an individual’s share of ownership in the property.
The term “equity loan” refers to a home equity loan secured or secured by a borrower against the home’s equity (the value of the property minus the balance of mortgage debt). In simple terms, the homeowner takes advantage of the “equity” in the home to refinance, whether or not paying off the mortgage. Home equity loan is the second mortgage loan, with the characteristics of secured loans.
For example, the market value of the house is $1 million and the loan is $200,000. Then the equity of the house is: $1,000,000-$200,000 = $800,000. The homeowner can refinance with $800,000 in home equity. Just like a regular loan, the bank approves the loan and pays the homeowner the principal and interest every month. This rate is generally higher than the first loan, but lower than other consumer loans.
Home equity loans
Currently, home equity loans are one of the most popular home loans. Because many people do not want to “lock up” their money in their houses. They may need some money to decorate their houses, buy a car or pay for their children’s school fees. Home equity loans offer more flexibility.
The most obvious benefit, of course, is the tax break. Home equity loans under $100,000 are tax deductible.
Compared with other secured and unsecured loans, home equity loans are a risk-free loan for the lender. It will provide the maximum amount that is proportional to the value of the equity. For a good home in a boom area, the equity loan plus the existing loan can be as high as 80% to 90% of the total value of the home.
Home equity loans can be used for a variety of purposes. Such as emergency situations, debt consolidation, medical loans, home improvement, education, or any personal reason.
Loan interest rates
Home equity loans usually have a fixed interest rate. Lenders will subtract or add a percentage, usually 1 to 2 percent, from their prime rate to determine the interest rate on your home equity loan based on your credit and the amount of money you want to borrow.
Home equity loans also have a wide range of repayment durations.
The range from 10 years or more to even 30 years.
Now the Internet and online lenders have made it easier and less time-consuming to process home equity loans. Often land title and credit score verification is a time-consuming step that becomes limited when verified online. So home equity loan approval can be completed in the shortest time possible.
CONS of home equity loans
But there are always two sides to everything, and home equity loans are no exception. They also have their drawbacks. Borrowers with a lot of money in home equity loans risk losing their favorite home if you default on payments. There is no guarantee that your own career will always be smooth, and you risk defaulting on your loans if you are hit by a layoff or financial crisis.
In addition, people near pensions cannot manage long-term home equity loans. The borrower must keep in mind that a long repayment schedule will cost you more in interest.
And if you’re unlucky, when you’re trying to sell your house and the price drops dramatically, that’s a loss also.
When the market value of a home is rising, it is not hard to get a home equity loan because lenders are so confident. It’s so easy for you to borrow a lot of money – but it could also mean losing your house maybe! So you have to be careful about interest rates and other conditions involved in trading. Detailed analysis of the characteristics of home equity loans is very important. Having a clear understanding of the pros and cons of it can help prevent people from entering into mortgages with false expectations.
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