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Do you need cash to consolidate debts or finance the college education of your family members? Are you having a hard time finding extra cash to supplement your income or meet unexpected needs? At such times you might be thinking that you have nowhere else to turn. But if you own your home and property, you could be practically sitting on top of an asset that can save you money. You must be thinking that there is no question of selling your house. But who said anything about selling anyway? The unencumbered value of your home, or the value remaining after subtracting the mortgage you’re still paying, can save you financial trouble. This can be achieved through home equity mortgage o home equity loan.
A home equity loan is a type of loan where the borrower uses the equity of his property as collateral. Equity is defined as the difference between the fair market value of the property and the unpaid balance of the mortgage. For example, if your home is worth $150,000 and you still have an unpaid mortgage of $75,000, the equity in your property is measured at $75,000. This means that lenders would be willing to loan you the equivalent of $75,000. As you pay down your mortgage, the value of your equity also increases. Thus, if your mortgage payments are up to date, you can easily apply for a loan for a larger amount, which is almost equal to, if not equal to, the value of your property.
Of course, taking out a home equity mortgage or loan has its pros and cons. And before you get too eager to apply for a home equity loan at your financial institution, it’s best if you know what you’re getting into and if a home equity loan is really right for you. Maybe the most obvious advantage of a home equity loan is that it’s relatively easy for anyone to qualify for, even if the borrower has bad credit. Most lenders and financial institutions consider home equity loans to be relatively safe, since your property is your collateral and you can’t lose your home if you default.
Another advantage of a home equity loan is that you can use the loan amount for any of your financial needs, either for funding college education, for funding home repairs, for medical emergencies, or for quick cash. To obtain or to reduce a debt. Home equity loans can also provide you with a larger lump sum amount than other loans, depending on the equity value of your property. This home equity loan is a great option for those who need a lump sum amount in the short term but with long-term rewards. Another advantage of this type of loan is that the interest paid on the loan is tax-deductible. However, the tax-deductible portion is only based on a certain percentage and may not make sense if you are in a high income bracket.
More importantly, home equity loans also have their drawbacks that you should be aware of before taking up the deal. Because home equity loans are similar to a new mortgage for your home, failing to meet the payment schedule can result in default and the lender or bank foreclosing on your home as a result. Thus, if you are not sure of a stable income that would allow you to pay off this loan, you risk losing your home. This is why obtaining a home equity loan is a risky proposition for those struggling with financial problems or considering a career change. A house may be their only asset and putting it at stake can be very risky. Another disadvantage is if the value of your property drops for any reason. You may pay more than your property is worth.
Yes, a home equity mortgage can save you. But if you are planning to take one, you should not take it as a ‘quick fix’ for short term financial needs but as an important financial decision. You have to be sure that getting a home equity loan is the best thing to do. You may consult your tax advisor for recommendations and guidance. You should also carefully consider your financial situation before applying for a home equity loan, or any type of loan for that matter.
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