Owning your home has many advantages, the most important of which is that it allows you to build up equity rather than shipping rent to a landlord. And having this equity means that if unexpected expenses arise, you can access funds in the form of loans secured by your home.
Of course, taking out a loan on your home is not something you should do lightly or on a whim. But if you do your research, understand the terms of your loan, and have a solid plan for paying it back, you can use home equity loans to your advantage.
What is a home equity loan?
You’ve probably heard of home equity loans called ” second mortgage.” This term is used because you are using the equity in your home as collateral for the loan, which means that if you fail to repay the loan, the financial institution can repossess your home to pay off the debt. Home equity loans are based on the current market value of your home and the outstanding balance on your mortgage. These loans are usually fixed rate, while home equity lines of credit have variable interest rates.
Because you are using your home as collateral, home equity loans are a form of secured debt, while things like credit cards are unsecured. Unsecured debt has no collateral attached, so it usually comes with higher interest rates. This means that a home equity loan is likely to come with a lower interest rate, meaning your money will go further. Home equity loans are for a fixed amount and have fixed monthly payments, which makes planning and budgeting easier.
What about the cons?
You should always understand the risks and terms of any debt you incur, regardless of form. Like all loans and debts, home equity loans have some drawbacks that you should be aware of. For example, if you want to get a lower interest rate on the loan, you have to refinance your home first, which means additional steps and costs to get the refinance. And if you fall behind on your payments, you could possibly lose your home. Additionally, if the value of your home declines, even if the cause is beyond your control, such as a downturn in the local real estate market, you could find yourself under water on your home. This means you owe more than your house is worth.
Every financial situation is unique, so make sure you fully understand your finances before looking into debt of any kind. Home equity loans cost money in the form of closing costs and interest payments, so you will always end up paying more than you get from the loan, but you will pay it off over time. You should only take out a home equity loan if you have a solid reason that will add value in the future, such as paying for your education, consolidating debt, covering emergency expenses, or renovating your home to improve its future value. the future.
As with all financial products, you should keep an honest record of your existing finances and develop a plan for how you will use the money and how you will pay it back. Remember that failure to do so with a home equity loan could mean the loss of your home. Finally, if you choose to go ahead with a home equity loan, be sure to work with a trusted professional who has your best interests in mind. With the correct information and a good plan, a home equity loan can be a good choice.
Finance FYI is presented by 1st Security Bank.
AT 1st Washington Security Bank, we take a personalized and personal approach to your financial well-being. We live in the communities we serve, so our branches offer tailored solutions to their communities. We believe relationships make the difference, which sets 1st Security Bank apart.