Benefits Of Home Equity Loan

Home equity loan will allow you to lend money for huge expenses or even aid you with debt consolidation. So as a responsible borrower who has a fixed and reliable source of income, a home equity loan will look like an excellent option. Mentioned below are some of its benefits.

  • Fixed Rate Of Interest:

Home equity loans usually come with fixed rate of interest. For the coming years of loan repayment, the rate of interest will stay fixed. So you can plan the loan repayment in a much better way when you will be paying it each month. A fixed rate of interest is much better than the variable one that keeps on changing with the economy’s as well as the lending company’s performance. In an environment of changing rate, a loan with a fixed rate of interest will offer simplicity in the budgeting. This is because the payments you will be making every month will remain constant over the life of that loan as well as not increase. So if the rate of interest rises, your payment will never get affected.

  • Low Rate Of Interest:

One of the biggest benefits of home equity loans is their low rates of interest. Any unsecured loan such as credit cards as well as personal loans are never backed up any anything. The lender only has some faith in you that you will repay the debts. This being a risky proposition, you need to pay a higher rate of interest. The rates of interest on the home equity loans are much lower than the personal loan’s rate or credit card’s rate of interest as your home will be used as the collateral. From a bank’s point of view, it is a strong guarantee that any borrower will be repaying the loan reliably. The bank basically assumes that the borrower will unlikely put his home at huge risk. A low rate of interest will aid in keeping the borrowing costs very low.

  • Large Amount:

Home equity loan is the easiest way to avail a large amount of money within a short time. Thus a fixed rate of home equity loan is excellent for those scenarios where the homeowner is exactly aware of what he is going to do with the loan. Home improvements, clearing of various debts, financing a child’s education can be included as the purpose of taking the loan. The amount you will borrow with any home equity loan will be provided in one large amount rather than you withdrawing the amount based on your needs. Thus you will have a flexibility to cover up large expenses. It is also repaid by making monthly payments that are fixed. Each payment will reduce the balance of the loan as well as cover up the cost of the interest on a very familiar amortization schedule.

  • Flexibility:

A home equity loan will offer the homeowners great flexibility when they will spend the money. There is no restriction on how you should use your money. Some loans need you to justify the plans for taking the money like putting up a business plan for availing a business loan. But you can use home equity loan however you want. You can begin a business, pay for your vacation, buy an investment or may be use it for any other purpose. Some of the reasons for making use of the home equity loan will be better than other loans. But once you apply for it and get it approved, you can use the large amount for anything you want.

  • Stability:

A large amount of home equity loan has stability. Thus homeowners prefer it. Home equity loans have a fixed rate of interest that never gets changed over the life of that loan. So once an individual takes a home equity loan, the money will be his. He will have to pay off the loan every month.

  • Tax Deduction:

Home equity loan is tax deductible. It is almost similar to the primary mortgage. As a result it is completely removed from any taxable income. The total tax expense liability is thus lowered. If you used the home equity loan for renovation of your home, then tax deduction will be there for all those monthly interests that you keep on paying on the loan. But there is a tighter limit on how much tax you can deduct if the borrowed funds are used for any other task rather than buying, building or improving a home. For more information you can consult a tax professional.

Home equity loan may appear to be a great financial move particularly in certain conditions. But you must think well before you opt for it. Compare each and every loan option starting from personal loans, credit cards to home equity loan, etc. and then take the loan that will best fulfill your requirements.

HELOC Or Home Equity Loan

Both the loans will make use of your home as the collateral, but HELOCs as well as home equity loans are different in terms of accessibility of loan funds along with repayments. Among these two types of home equity loans, understand well which one will be most suitable for your situation.

HELOC:

Equity line of credit will allow you to draw cash as you require it till your credit limit. HELOCs are adjustable loans in order to make your monthly payments changed along with the market. Often these loans will let you pay the interest only for some time. This can reduce your monthly payments till you are almost ready to clear off the principal payment. The interest on this loan in most cases is tax deductible for loan amounts till $100,000.

Who Will Be The Most Benefitted?

Individuals who require access to a huge amount of cash over a long period of time will be most benefitted by HELOC. During renovation of your home, you can periodically withdraw cash and pay contractors. HELOCs will provide with the flexibility of accessing cash, but not making any interest payment until you withdraw it.

Benefits And Risks:

  • HELOCs offer flexibility. You can withdraw the cash when you require it and then pay the interest on the used amount. But be clear that most of the lenders will require a least withdraw at closing.
  • HELOCs will have lower upfront charges than home equity loans. Some lenders will offer to pay for the closing costs.
  • The main drawback of HELOCs is that they make use of a variable rate of interest that is pegged to the prime rate of interest. It can become higher any year. So with HELOC your interest payments will increase. To qualify for HELOC you require a very good credit score.
  • Tax changes along with the rising rates are making the interest in HELOCs go down.
  • Customers prefer refinance to combine the existing first mortgage with a HELOC into a single loan.

Home Equity Loan:

It is the second mortgage that comes with a fixed rate of interest. You repay the interest along with the principal every month. The payment is usually received as a huge amount and you will not be able to withdraw extra money from this loan. The rate of interests of home equity loans is higher than that of the same amount of HELOCs because you are having the security of a fixed rate. The interest is generally tax deductible for loan amounts till $100,000.

Who Will Be The Most Benefitted?

If you want money for any one time event and also prefer security of the fixed rate loans will be the most benefitted. Home equity loan is a great option if you wish to keep the existing mortgage as well as prefer to get cash in a huge amount.

Benefits And Risks:

  • It has a fixed rate of interest for the loan term. This is one of the major benefits of a home equity loan in this current scenario of increasing interest rates.
  • With the help of home equity loan, you will be able to avail a huge amount upfront and continue with the same stable payment. Thus a home equity loan can be easily budgeted.
  • If you already have a mortgage, you need to keep track of the two separate loans and then make two different payments each month.
  • Like a regular mortgage, this loan also has the same kind of closing prices.
  • These costs will take their toll, if you are not ready to borrow so much money.
  • The rate that will be offered by the lenders for a home equity mostly depends on an individual’s credit score. So a credit score below 700 will make you pay a high rate in order to compensate for any risk that the bank feels while giving the loan.

Which One Will Be Right For You?

There lie both advantages along with disadvantages for both the loans. So make the right decision depending on your financial needs. In case of huge expense along with proper idea of exactly what it will charge you, you will be more benefitted by taking a home equity loan with fixed rate of interest as well as huge amount. Not only this, you will also be having greater certainty related to your repayment terms as well as overall cost of interest over the period of the loan. This will let you plan your budget in a precise way. So while planning to buy a rental property or any vacation home, home equity loan will act as a better plan.

If you get into a situation where you require direct access to cash, but not aware of how much exactly you need and for how long, then HELOC will be much better for you. By taking this benefit of higher flexibility that is provided by HELOCs, you will be able to borrow what you require as well as avoid paying interest on whatever you do not. So if your child is studying in a college, you will be able to borrow some money for tuition fees or even lodging. You can also avoid paying any interest on the borrowed money till the time you actually require it.

So now that you are well aware about both the loans, you can select either HELOC or home equity loan according to your financial requirements.