Exploring The Benefits And Risks Of Home Equity Loans And Lines Of Credit

by Robert F. Read My Articles, Learn More... Through credit research and risk analysis, one can determine whether or not he or she has appropriate lines of credits for a home equity loan to be more of a benefit than a risk. The key to making this decision is understanding more about home equity loans and lines of credits as you explore the benefits and risks. By the time you finish understanding, you will have also complete your credit research and risk analysis. Then, you will know if a home equity loan is the answer to your problems.

Home Equity Loans and Lines of Credit: What Are They?

Technically, this type of loan is more or less the exact same as any other type of secure loan you would encounter. The biggest risk with this type of loan is the fact that the security that you will give the money back to the loan provider is your very home. There are two different type of loans you can get based on the equity of your home:

1.    Home Equity Loan – This type of loan is given to a person in the form of a chunk of cash. You could also get this as a series of smaller loans. Either way, you are required to make money payments with interest attached. This is very similar to taking a mortgage out on your home.

2.    Line of Credit – With this type of loan, you will be approved for a set amount of money. Then, you will get to decide how you want to use the money. More or less, you will be given a credit card with a much larger spending cap than most credit cards. Any money you take out, you will pay back plus an interest. Money that you do not use, will not collect interest or need to be paid back. Naturally, most people get this loan with the intention of using it. So, that doesn’t matter too much.

Now, you are probably thinking that these sound an awful lot like getting a credit card with a high spending limit or a second mortgage.

So, What is the Dissimilarity Between This Loan and a Second Mortgage?

After all, if there is not some big variation – why shouldn’t you just get a second mortgage instead? Technically, the two really are not that variation when it comes to what they offer.

In the real estate industry, you can take out several loans and liens against a piece of property you own. This is how people end up with two or three mortgages just to have a home. Second mortgages come with higher interest rates than a first mortgage does in most cases. This is because not paying your second mortgage really doesn’t mean much if you are paying a first mortgage too. The second mortgage doesn’t have dibs on your home.

In a large number of cases, a second mortgage is just a specific type of home equity. In which case, there really isn’t a variation between the two. The variation, however, is in the terminology. A mortgage is a type of legal lien. A home equity loan is a form of debt on your credit history. Given the choice, most people would rather have another debt on their credit history than a legal lien.

What’s The Variation Between Home Equity Loans and Credit Cards?

Now, that you understand the variation between a home equity loan and a second mortgage, you should take a closer look at how it compares to a credit card. This way you can make sure you wouldn’t be better off just getting a credit card instead.

A home equity is very much like getting a personal loan with a very high spending line. In most cases, you will be given anywhere from ten to twenty years to pay back a home equity loan. It is also very much like a credit card because you get a set amount of spending money. You spend what you want, and make a payment with interest on what you’ve spent (and only what you’ve spent).

The key variation between a home equity loan and a credit card tends to be the amount of money you get as a line of credit. Most home equity loans are going to have a much higher spending limit than a credit card will.

This means it really comes down to a matter of which one provides you with enough money to purchase everything you needed the loan for in the first place.

Exploring the Benefits of a Home Equity Loan

The easiest way to decide if a home equity loan is right for you is to take a closer look at the benefits. Here are the benefits of a home equity loan:

•    The number one benefit to a home equity loan is how flexible. With a personal loan, you need a specific purpose for the loan. This really isn’t the case when you get a home equity loan.

•    A home equity loan is also an ideal choice because you may be able to write it off as a tax-deduction. This largely depends on what size income you have for the year. Naturally, individuals with a substantial income are not going to be able to write this kind of loan off for very much money. In most cases, someone with a large income wouldn’t need this type of loan in the first place.

Is a Home Equity Loan The Answer?

As you are trying to decide if this type of loan is right for you, you need to do some credit research and risk analysis. If you need more money to add value to something in order to reap long term benefits, this is a great idea. If you are in need of quick cash because you are in a financial hole, this may not be the answer to your problem.

The key thing to remember is that there are other options and a home equity loan and line of credit is not the right solution for everyone.

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Created on Dec 31st 1969 18:00. Viewed 0 times.

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