If you own a property and are in need of money and you have accumulated enough equity on your house, then you can convert this equity into cash and meet your financial needs. The advantage of drawing on your home equity is that the rates on home equity loans are significantly lower as compared to other unsecured loans such as personal loans or credit cards. You will also get tax advantages associated with home equity loans as the interest that you pay on them is tax deductible till a certain limit. Also appealing feature of home equity loans are their relatively low closing costs.
What are home equity loans?
Home equity loans are basically a type of second mortgage. They are so called as they are subordinate to your primary mortgage. If you cannot make your mortgage payments and as a result default, then the first mortgage is paid off first with the proceeds of the sale of the house and any leftover goes to second mortgage. As a result lenders of home equity loans are more at risk. Even then, the rate offered is comparatively lower than other unsecured loans. A home equity loan is a fixed-rate loan where you are given a lump sum amount by the lender which you have to pay back within a specified period of time. Each month you have to pay the interest amount and a part of the principal. These loans are most appropriate if you are borrowing money for any financial purpose in which you already know how much money you would require. This kind of loan also gives you the consistency of making a steady monthly payment. As you keep paying back the borrowed amount each month, you go on building your equity.
How much money can you borrow?
Usually most of the banks allow you to borrow up to 80% of the total equity that you have build on your property. In order to calculate that amount, you have to determine the current value of your home. In the next step you have to subtract the value of what you currently owe on your mortgage. Then you divide the number by 80% and you can get a rough estimation of how much you can borrow at the most against your home equity. Thus you can now go ahead and borrow money against the equity on your home.
Author?s Bio: Marie Lewis is a financial advisor for EasyFinance.com. She brings an unique perspective on personal finance, frugality and all kinds of consumer financial products and services.
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