In short, a home equity loan can be described as follows: you get money from the bank and promise to return it, and if you fail, the bank can sell your property of and thus pay off the debt.
In more detail, a home equity loan is a transaction supported by property. Such loans are given for a long term, and the rate for them is significantly lower than for personal loans. Because of this, the monthly payment is relatively small. That is, it is easier to repay a loan secured by real estate than others.
The amount that can be borrowed from the bank is usually about 75% of the value of the property. You can take less, you cannot take more. But even so, it turns out that a secured loan can be significantly larger than a personal loan.
When people usually get home equity loans
A secured loan is a tool that helps you get out of difficult situations. For a regular loan, you need to confirm the income to the bank, and this is not always possible. Many banks may not like the fact that the applicant does not have a permanent income but has seasonal earnings or a small business (entrepreneurs know how difficult it can be to get borrowed funds). At the same time, a person can afford monthly payments, but banks are reinsured.
Another option is when a large amount is needed, and you already have loans, for which you pay a lot every month. For example, you bought a phone, a refrigerator using a credit card – and you have to give half of your income (or even more) to cover the already collected loans. This is a very high debt load, in which payments on another loan will become completely unbearable.
A good way out is to take a big loan to pay off all the small ones. But who will give money to a person who is already fully “credited”? That’s right, only an organization that has inconceivable interest and overpayments, or a bank that agrees to work on the security of real estate.
A home equity loan is secured by real estate, so the bank does not need income certificates.
Why do people choose a home equity loan?
A large amount may be required at any time. Moreover, each American chooses an organization that is ready to provide a loan on the most favorable terms. A loan secured by real estate is the best option for those who need an impressive amount for a long period.
The main reason for the popularity of this financial instrument is the relatively low-interest rate. When providing such a loan, the bank or other organization receives a guarantee that the client will somehow repay the debt. Otherwise, he or she risks losing his or her home, and no one wants this.
Pros of a home equity loan
- The main advantage of a loan is the transformation of real estate into an asset. In fact, real estate starts working for the owner and brings him/her money, and does not stand idle;
- Amount. Collateral loans are usually large;
- The loan is given for 10-20 years;
- Increased percentage of approval. Such loans are provided even in cases where other loan options are not available;
- Secured loans have favorable rates so that monthly payments are relatively small;
- Such a loan can be taken for the purchase of real estate, it can be more profitable and more convenient than a mortgage (no down payment is required).
Things to consider when choosing the best home equity loan
Any mistake in the real estate loan process can be fatal. In order to prevent it, before taking out a loan secured by real estate, you need to consider:
- the conditions on which the lender is ready to lend money – this includes the size of the interest rate, the set of documents required to sign the agreement, and a number of other factors. At the same time, you should remember that not always organizations that lend at minimum interest are ready to keep their promises. Often a low percentage is just an opportunity to advertise a company. In fact, a client who has contacted its office is faced with a different proposal, the interest on which is 2-3 times higher than promised;
- the lender’s reputation – in any case, you’d better trust your home to reliable organizations. Often these are the old “players” of the financial market: large banks, well-known private lenders. At the same time, one should not think that organizations that appeared just a few years ago will deceive the client;
- additional payments on the loan – no one wants to spend money on servicing the account or pay fines for early repayment of the loan. Therefore, when taking out a loan secured by real estate, it is important that the contract does not contain clauses about any additional payments.
Studying these three factors will allow you to select the best home equity loan from the lender that will meet all your expectations.