Equity is defined as the difference between the property value and the mortgages and loans secured on it. For example, if Mrs X has a property worth $300,000 and secured homeowner loans amounting to $100,000, she would have $200,000 of available equity. A home equity loan involves borrowing money against this figure. The most common reasons for taking out a secured loan include home improvements, debt consolidation and buying a replacement vehicle.
Advantages of Home Equity Loans
- Borrow larger sums of money. The provision of collateral means that, subject to affordability and available equity, a consumer can borrow a larger sum of money. A number of secured homeowner loans are available for several hundred thousand dollars.
- Reduce debt repayments. Those with unpaid credit card debt, small loans and repossession deficiencies may be able to reduce borrowing costs considerably.
- Simplify personal finances. The borrower makes a single monthly repayment rather than lots of small payments on multiple debts and bills.
- Tax benefits. The interest on a home equity loan may be tax deductible.
- Any-purpose loan. There aren’t any restrictions on what the money can be borrowed for.
- Home improvement loans. Performing one or more improvements to a property could potentially increase the property value by more than the loan. It may also mean that the individual doesn’t need to move house so can avoid all the expenses associated with it.
Disadvantages of Home Equity Loans
- Foreclosure due to default. Failing to keep up with the monthly debt repayments may result in repossession and the asset being sold.
- Unsecured vs secured debt. Turning unsecured into secured debt gives a creditor additional ways to get their money back. Unsecured debt could be handled with a debt settlement program.
- Over-borrowing. The offer of a secured homeowner loan can be extremely tempting. This often leads people to borrow a lot more than they actually need.
- Extending the term. Whilst increasing the borrowing term reduces monthly repayments, it also extends the life of debt. This means that a higher amount of cumulative interest will be paid.
- Early redemption penalty. Paying off a home equity loan early will normally mean that a homeowner has to pay a penalty amounting to thousands of dollars.
- Negative equity. Over-borrowing could mean that a homeowner faces negative equity when property prices are declining. This would make it very difficult to move house or refinance.
Are Secured Homeowner Loans the Right Option?
Whether a home equity loan is the optimal choice depends heavily upon what the money is being used for. For example, a home improvement loan could increase the value of a property. However, a bad credit unsecured loan for debt consolidation isn’t normally a smart move idea because it involves turning unsecured into secured debt. A debt management plan or debt settlement program may offer a better alternative. It is important to appreciate that there are other ways to reduce debt repayments.