What makes home equity loans seem more desirable?
Lot many people use this loan to borrow, as the interest is tax deductible and rates are usually lower than many other type of loans. Also they are easy to obtain and you can borrow up to 80% of equity in your home. That is to say that if your home is valued at $ 125,000 and your mortgage balance is $50,000, you can borrow up to $60,000(80% of your $75,000 equity).
But there is a catch in it and you should be aware of it before you take the final step of going in for this loan.
When you go in for equity loans, you use your house as an assurance on the loan and if you cant make your payments on time, you could lose your home. Lender becomes the owner of the property and will try to sell it so that he gets the money back that you had lent. To lose your home seems to be a hard bargain.
Lot many people take out a home equity loan to take advantage of the equity in their home. They use this money for purchases, vacations, and other expenses, counting on the house appreciating in value to cover these expenditures once they sell. If it doesn't, they owe more than the house is worth and are "upside down" on their loan.
Being "upside down" on your loan means that you owe more than your home is worth, and this can easily happen if real estate values fall. If you try to sell your home under these circumstances, you will incur losses that you will have to pay for out of your own pocket when you pay off your mortgage at the time of the sale. This can cause severe financial hardship or can force you to stay in a house you no longer want to live in.
Just because you have equity in your home doesn't mean you can afford the monthly payments of an additional loan. Be sure to do a careful analysis of whether the home equity loan payments fit comfortably into your budget.
Home equity loans are best used for home improvements that will increase the value of your home. Some improvements, such as swimming pools, don't usually increase the value upon resale. Others, such as additional bathrooms, living space, renovated or updated kitchens, etc., generally do increase the value of your home.
Conclusion: these loans should not be used lightly. If your home is worth more than you owe on it, a home equity loan can be a great way to take advantage of this, but it can also get you into serious financial trouble, and should be used wisely. Why not use the equity in your home as part of your retirement fund instead of spending it on things that may not last?
