Financial Education

What is a home equity loan? Find out the pros and cons

Purchasing a house or apartment of your own can be a big challenge. In this sense, learn how a home equity loan can help you!

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Home equity loan: Realize the dream of owning a home without suffering

home equity loan
Find out about home equity loans! Source: Adobe Stock

Owning your own home can be a dream for many people, including yours. However, many people do not know there are easy ways to fulfill this dream, such as a specific loan. But what is a home equity loan?

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Different types of loans available

Are you in need of money? A loan can be the immediate solution you need. Learn about the main types of loan you can take out.

A home equity loan is a specific type of loan to purchase a home. Interest rates and payments are flexible and determined according to each person’s credit score. Learn more about this option.

What is the purpose of a home equity loan?

Conquering a home of your own can bring a headache regarding finances. However, you can rest easy with a home equity loan. But what is a home equity loan, and how does it work?

An equity Loan is a type of consumer debt made to get money. In this sense, the money should be used to pay for house renovations or purchase the property itself.

However, this financial aid is granted with the security of payment for the house or apartment. So, if you don’t make the payment correctly, you risk losing your real estate assets.

Either way, the loan amount is based on the difference between the home’s current market value and the mortgage balance.

Therefore, this type of loan includes a fixed monthly interest rate, unlike other types of loans.

Are home equity loans the same as a mortgage?

home equity loan
Can home equity loans be mortgages? Find out! Source: Adobe Stock

A home equity loan can also be considered a type of mortgage with some modifications. In this sense, the property is involved in both cases and given as payment security.

However, the real estate loan is carried out after you own a house or apartment. That way, you can apply for the loan and secure your own house.

But, in the case of the mortgage, the loan serves as an aid for you to buy the house. That is, it allows the buyer to own their home with financial aid.

However, in both cases, the house can be given as security for the correct payment of the loans. Therefore, they are very similar types of loans with similar interest rates.

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Home equity loan pros and cons

The value of a home is high and can bring financial difficulties in the acquisition. So home equity loans can help.

But what is a home equity loan, and what are its benefits? It is a great option for you who want to pay off your own home or do a renovation.

Therefore, it has fixed rates and reduced interest in the case of reform. However, they can also put your home at risk because it is given as collateral. Check out the pros and cons.

Advantages

  • Home equity loans bring greater clarity to payment. After all, the rates are fixed and not variable, as in other types of loans;
  • It is possible to earn a much lower interest rate than you would with a credit card or personal loan;
  • You can stay with the low mortgage rate if that’s the case for you;
  • If the justification for requesting the loan is housing improvement or renovation, interest can be renegotiated and reduced.

Disadvantages

  • Flexibility is reduced compared to other options, such as a line of credit to invest in housing;
  • Regardless of adopting an incremental format for using the loan, you will need to pay interest on the full amount. This is also true for a small or complex renovation project;
  • There is a possibility of losing the asset. In this case, as the house is given as security for cases of default, the house can be lost;
  • The sale of the house before paying off the loan completely may have problems with the balance, which will appear as due.

Does having a home equity loan hurt your credit score?

A home equity loan can reduce or negatively affect your credit score in several ways.

Firstly, when you apply for a loan, it is recorded in your history that you need money. Thus, the loan affects your score by up to 10%.

In addition, the credit consultation carried out by the lender to be able to release the loan affects the score.

In this sense, your score may have a new decay with each query. Therefore, it is important to think very carefully before hiring.

How much can you borrow with a home equity loan?

home equity loan
Learn about how much you can borrow for home equity! Source: Adobe Stock

The amount to be granted by this type of loan varies according to the value of the home to be insured. That is, the higher the value of your home, the greater the chances of earning more money and low-interest rates.

However, for the request to be made, it is essential that certain requirements are met. In this regard, it is important to have home equity of at least 15% to 20%.

In addition, the applicant must have a credit score of 620 or higher. Finally, a record debt-to-income ratio of 43% or less is important. That way, the chances of getting a good home equity loan are higher.

In any case, the value will be calculated based on an analysis of all characteristics. However, the value will be based on up to 80 to 90% of the home’s appraised value.

Additionally, associated interest rates are calculated based on credit history and score.

What can you use your home equity loan for?

Now that you know what a home equity loan is, understand what it is for. This type of loan is intended for people who need quick and immediate cash and want lower interest rates.

In this sense, the house can be given as security for paying the installments. Therefore, you can borrow the money for almost any purpose, securing the house and having fixed rates.

Should you apply for a home equity loan?

As you can see, the home equity loan is ideal for people who own a home. Therefore, you can have access to a significant amount by giving the house as security for the payment and use it however you want.

However, you may also have access to other types of financial aid, such as auto loans. In this sense, the allocation of the amount granted is reversed in the purchase of a car. Check out more in the post below.

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