Home equity loans are something that are mentioned, but few people actually really understand. So just what are they and can they be a good option to consolidate your existing debts?
Basically, a home equity based loan is a type of loan that acts similar to a second mortgage. You will be borrowing a sum of money based on what your home is worth and it does, unfortunately, come with quite a high risk. Now there are different types of home equity based loans that you should be aware of. These include:
- A Closed End Equity Loan
- Home Equity Line of Credit
The above are the main two types of home equity based loans available and, generally, the Closed End Equity loan is the most popular. This is because it allows you to borrow a set amount of money that is secured against the value of your home. However, you need to think carefully about how much you borrow.
For example, if you have the opportunity to borrow $50,000 but you choose to only take out $25,000, you will not be able to borrow the extra $25,000 later on and you would actually need a different type of loan. So make sure that the amount that you are borrowing is actually the amount that you need.
A home equity loan could benefit you by helping you to pay for anything you basically want. You will receive the payment in one large sum, or you could choose to receive it in smaller monthly portions if you would prefer. You can basically spend the money on anything you like and many people do choose to consolidate their loans with them.
It is usually the case where people have more than one type of loan throughout the period of their lives. It could be that you have store card debts, credit card debts and personal loans that all demand a monthly repayment. If so then consolidating your debts using a home equity loan would certainly be a good idea. While you will not be getting out of debt initially, you will be helping to make your repayments a little more bearable. You will be combining all of your different debts into one manageable monthly repayment.
Now, the main advantage of a loan that is based on your home equity is that you should be able to get a low interest rate on the loan. This is because the loan will be secured against your property and lenders see that as a good thing because it gives them a little security if you fail to pay them back. This means that while it may be good in the beginning because of the lower repayments, you do still have to ensure that it will benefit you in the long run.
Can you afford to pay off the monthly repayments on the equity loan every single month? It is essential that you do not miss any repayments as if you do, you could easily lose your home. Overall, home equity loans can really help you to consolidate your debts and give you better control over your finances.