If you need to borrow money and you own a home, it might be a good idea to look into home equity loans. However, you need to do your research carefully so that you fully understand this type of loan before you borrow.
The following are six characteristics of a home equity loan to be aware of.
Your credit will be impacted by a home equity loan
Some consumers might make the mistake of assuming that credit is not a major factor in home equity loans because they are secured by collateral. However, this is not the case.
Lenders of home equity loans will review an applicant's credit score carefully. Borrowers may need to have a minimum credit score to qualify. Also, falling behind with payments on a home equity loan can negatively impact a consumer's credit.
Home equity loans are easier to qualify for than unsecured loans
Although a credit check is usually necessary when applying for a home equity loan, credit history requirements may not be as stringent for this type of loan as they are for unsecured loans. Because there is collateral, lenders may be more likely to approve an applicant with less than perfect credit.
Home equity loans use your home as collateral
The major feature to be aware of with a home equity loan is that such a loan will use a borrower's home as collateral. This means that the borrower is risking his or her home.
If the borrower falls behind on home equity loan payments or defaults, foreclosure is a possibility. That's why it's very important for borrowers to keep up with home equity loan payments.
Home equity loans can be either fixed-rate or lines of credit
There are two main types of home equity loans that lenders commonly offer. These are fixed-rate loans and line of credit loans. With a fixed-rate home equity loan, the borrower receives loan funds as a lump sum. The borrower then makes payments on the loan on a monthly basis until it is paid off.
A line of credit home equity loan works similarly to how a credit card works. The borrower charges purchases to the line of credit and makes payments on the outstanding balance.
You'll need to pay off a home equity loan immediately if you sell your home
Borrowers need to realize that their home equity loan is tied to homeownership. It's a requirement that the loan be paid off in full at the time that a borrower sells his or her home. Otherwise, the home would no longer be securing the loan as per the original loan agreement.
You can spend home equity loan funds on anything you want
One great advantage of home equity loans is that they don't have to be spent on a particular expense. Borrowers can use the funds on anything they like. Often, borrowers use home equity loans to pay down debt or to finance a home improvement project.Share