The reasons for a home equity loan

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Written By KennethChing

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The reasons for a home equity loan

The Top Five Reasons to Get a Home Equity Loan

Are you eligible for a home equity loan?

Home equity loans allow you to borrow money by using your home’s value as collateral. Lenders are more comfortable lending money on this basis because they know they can rely on the home’s value even if it isn’t possible to pay the monthly payments.

Because it is so attractive to keep a home, payments could be given priority status as funds are divided up each month. This is a good thing for the borrower because banks and credit unions feel safer and are more generous. These are five reasons to consider a home equity loan.

A low interest rate is important to you

The lender does not have to reap the rewards of a home equity loan. The bank and other financial institutions that offer loans want to make sure they get the best return possible, so they offer HELs at lower interest rates than other types of loans. If you have high-interest credit card debt, this low interest rate could be a benefit to you. Forbes contributor Erik Carter says that refinancing high interest credit card debt with a home equity line of credit or loan can be a smart move, as your interest rate may be lower and you could get a tax deduction.

Credit scores are low

A HEL can be more accessible to people with lower credit scores than other types of loans. This is especially true in light of recent economic difficulties. A home equity loan is a good option for those who are unable to borrow the amount they need at a fair interest rate.

You need to borrow a large amount

Even those with excellent credit may have to borrow against their home’s value in order to get a large amount of money. A HEL is a great option if you need to borrow large amounts of money.

A lump sum is required

A home equity credit line is different from a loan. A loan is paid in one lump sum and has monthly payments. While a loan can be drawn from a fixed limit to meet varying monthly expenses, such as a credit card, a credit line lets you draw funds from a predetermined amount. A loan is a better option than a credit or credit card if you require your money immediately, such as to pay the down payment for a second house.

Tax deductions are possible

A home equity loan can also have tax-deductible benefits. This is something your tax advisor will help you decide if it’s possible.

Refinance a home equity loan

Refinance your home equity loan

The short answer is yes. A home equity loan can be refinanced in the same way as a first mortgage.

You will need enough equity to cover all the mortgages and loans attached to your property to do this. A majority of lenders will require that you have a combined loan to value (CLTV) ratio no higher than 85 percent. This means that the total amount of your mortgage debts cannot exceed 85 percent of your home’s total value. This benchmark will have been met when your home equity loan was first obtained. However, you may need to review it again if you decide to refinance. It is possible that your home has lost value since the loan was first taken out.

Refinancing a home equity loan: The pros and cons


Refinance a home equity loan can bring you many benefits:

  • Lower monthly payments: If you can get lower interest rates, you will save both on your monthly payment and overall interest.
  • Reduce or extend your repayment term. This will reduce your monthly payment, but also increase your interest costs. You might also consider a shorter term loan, which will increase your monthly payment but allow you to pay off your debt quicker, save you interest, and make your monthly budget more flexible.


Refinance of a home equity loan has its drawbacks:

  • Prepayment penalty Depending upon the type of home equity loan you have and your lender’s policy you may be charged a fee for refinancing before a specific time.
  • You could be in foreclosure if you are unable to make the monthly payments. You might also lose your ability to refinance if the value of your home drops.

Refinance a home equity mortgage

You can refinance your home equity loans by getting another home equity loan. The new loan may have a lower interest rate or a shorter term.

Refinance of a regular mortgage requires that you provide financial and credit information. You must also pay any fees or closing costs.

Bottom line

Refinance your home equity loan is a good idea if the rates have fallen since you took it out. Be sure to take into consideration your timeframe for staying in your home and any fees.

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