Home Equity Loan is a type of loan for which your home is kept as collateral instead of any other asset such as property or car. Home equity loan is similar to second mortgage loan in the sense that it affects the ownership of your home. The value of home equity is extracted by subtracting the current value of the house and the mortgage. If the value of your home is £200,000 and the mortgage is £150,000, a home equity loan will leave you with £50,000 worth of ownership of your home only.
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Types of Home Equity Loans
Home equity loan is categorized into two types:
- Second Mortgage Loan
- Home Equity Line of Credit
Home Equity Loans- Advantages
- The major advantage of home equity loan is its low rate of interest. Since your home is in the custody of the lender, there is less risk of your defaulting.
- The second major advantage is that regardless of the way a home equity loan is used, the interest you pay on the first £100,000 you borrow is tax deductible. Credit cards and other types of non-secured loans do not have this tax benefit.
- In case of home equity line of credit, you get cash when you need it since it works like a credit card does. You can pay bills or finance a home renovation project using this type of home equity loan.
- A second mortgage loan gets you a fixed amount of money all at once if you need it to cover a number of expenses.
- It is easier to qualify for home equity loans even if you have bad credit since your house is pledged as collateral.
Home Equity Loans- Disadvantages
- In case of home equity loan, you can’t default. If you do so, you will lose your home because it is pledged as collateral against the loan.
- When you put your home as a guarantee, your ownership margin will definitely reduce.
- You also have to pay some other costs against the loan you get. These costs are similar to the costs you pay when you buy a house.
- Since you are pledging your home, you may have to consider insurance to cover payments just in case a problem arises. It is a good idea to review and plan your financial prospects ahead of time.
Home Equity Loans- Uses
A home equity loan can be used for anything like debt consolidation, credit card bills, home renovation, car purchase, education, business investment, living expenses, etc. It can also be used for paying for medical expenses and emergencies or helping out a family member. You can also use these loans to finance the purchase of another house.
Home equity line of credit which is a type of home equity loan can be used to pay bills that come in installments. It works as a credit card in many ways. It can be used for expenses like a long term renovation project that requires payment of bills as they come
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