There are many reasons to get a loan for home equity
Here are the Top Five Reasons You Should Get a Home Equity loan
Are Home Equity Loans right for me?
Home equity loans, a type 2 mortgage, allow you to borrow money with the collateral of your home. Lenders consider this a safe option because they know that you can trust the value of your home even if you are unable to make the payments.
The payments can be given priority status when funds come in each month. This is because the incentive to own a home is strong. This is good news to the borrower as banks and credit institutions feel more secure when they offer loans. There are five reasons you might consider getting a loan for home equity:
You desire a low rate of interest
The benefits of a home-equity loan do not only belong to the lender. Banks and financial institutions that give loans prefer to do it in a way that ensures them the highest return. HELs have lower interest rates than many other loan types. If you have high interest credit card debt, this lower interest rate may be advantageous to you. Forbes contributor Erik Carter said that “refinancing highinterest credit card debt using a home equity loan, or line of credit, can make sense since your interest rates could be much lower, and you may be tax-deductible.”
Low credit scores can lead to low credit scores
Low credit scores can make it easier to get a HEL than with other types of loans. If borrowers find it difficult to borrow the money they desire at a favorable rate, they should consider a home equity loan.
You wish to borrow large amounts
Even people with great credit might need to borrow against the home’s worth in order receive large amounts of money. HELs are a good option if you’re in need of large amounts of borrowing.
A lump sum is needed
The difference between a home equity loan and a loan, is that a loan is distributed in one lump sum with fixed monthly payments. A credit line, on the other hand, allows you to draw funds from an arbitrary limit depending on your monthly needs. A loan may be better than a credit/credit card if you need money quickly, like to purchase a home or make a down payment.
A tax deduction is possible
A home equity loan may also offer tax deductions for the interest that you pay. Ask your tax advisor if this is possible.
Refinance a loan against your home equity
Is it possible to refinance a home equity mortgage?
The short answer to your question is “Yes.” Refinance your home equity loan may be possible as with a first mortgage.
This will require you to have sufficient equity in your home to pay off all loans and mortgages. Lenders require that your combined loan-to value (CLTV), ratio is no greater than 85 percent. This means your total mortgage balances must not exceed 85 percent of the home’s overall value. You will have met this threshold when you received your first home equity loan. If you wish to refinance, however, it may be that your home value has dropped since then.
There are pros and cons to refinancing your home equity loan
Pros
There are many benefits to refinancing your home equity loan:
- Lower your monthly bills: All things being equal, a lower interest rate will help you save money on both your monthly payments, and overall interest.
- You can shorten or stretch the term of your loan. If you decide to switch to a longer term such as 10 years, your monthly payments will be lower. However, this will increase your interest rates. Alternately, you could opt for a shorter loan term. This will raise your monthly payments, but also allow you to pay off the debt sooner, save interest and give you more money in your monthly budget.
Cons
There are some drawbacks to refinancing your home equity loan.
- Prepayment penalty It depends on the type and policy of your lender. You might have to pay a fee if your refinance occurs before a specified time.
- Risks of default: If your payments are not made on time, such as if you have a shorter-term loan that has a lower monthly payment but you cannot afford it, you could face foreclosure. If your home’s value declines, you may not be eligible to refinance.
How to refinance your home equity loan
Refinance your home loan can be done by applying for another home equity loan. You might get a loan with a lower interest and a loan term that is either longer or shorter.
Like a regular mortgage refinance application, you will need to provide financial information and credit to the lender. Also, pay any closing costs.
Bottom line
If rates have dropped in the past, refinance is best. Consider your timeline and consider any fees.
