Unlike traditional secured loans that require collateral to be put up in return for the money, a Home Equity Loan is a way of borrowing money based upon the value of your house. The meaningful information here is ‘equity’, which refers to the difference between the amount you owe on a mortgage and the actual value of the character – so, if you had a £150,000 mortgage but the house was valued at £250,000, then you’d have £100,000 worth of equity to play with. By using a Home Equity Loan, you could potentially free up that money and use it for a variety of things, from home improvements (which could increase the value of your home further) or a car to funding a child’s education, consolidating debts or already buying a second home. Thanks to the fact that you’re basically borrowing money on top of at any rate mortgage you might already have, it’s no surprise that many people refer to Home Equity Loans as ‘second mortgages’.
Of course, the big catch with Home Equity Loans is that there needs to be equity obtainable in your home before you can borrow against it. With home prices considerably lower than they were as little as five years ago, this might be difficult for some home owners and impossible for others, since a lot of people today are discovering that their homes are truly worth less than what they paid for them! If you’re considering a Home Equity Loan then, it’s important to check that there’s truly something you can borrow against before making an application, as being declined can be both embarrassing to yourself and potentially damaging to your credit rating.
You might also struggle to get a Home Equity Loan if you’re experiencing from bad credit, since lenders might see you as a risk to lend the additional money to. In these circumstances, it may be better for you to consider a Bad Credit Loan or some other form of borrowing that you can obtain on your home, without the need to extract equity from it.
in spite of of your circumstances though, there are two very crucial things that have to be considered before taking out a Home Equity Loan. Firstly, do you really need it? There are many other different types of loan product out there right now that could do the job just in addition without putting the equity in your home at risk, so it might be worth considering those first instead. Just as important is the lender you’re going with – instead of accepting the first offer you get, check out a number of firms and, where possible, play them off of one another to ensure you’re going to get the best deal obtainable. Every lender is different and you might discover some offers that wouldn’t otherwise have been obtainable if you look hard enough; already if you’re in something of a rush to free up the cash, it’s always wise to look before you jump!
A home equity loan…
- Is often referred to as a second mortgage by lenders and edges
- Allows you to borrow the difference between your home’s value and your mortgage amount
- Requires there to be additional equity in your character before you can get one
- Might be hard to get if you have a bad credit rating or other financial difficulties
- Should always be considered thoroughly before you sign on the dotted line
Copyright: Individual Finance, 2010