Home improvement financing and debt consolidation are two of several financing concerns that almost every American homeowner faces. Only with the total amount of consumers’ debt, a whopping $14 trillion has to be paid by many US citizens.
This increasing consumer debt is one of the reasons why many homeowners are ineligible for home improvement loans, too. Specifically, around $800 billion out of the said $14 trillion is made up of outstanding credit card debt.
Typically, when you have outstanding credit card balances, your credit score will be poorer. And when your credit score is bad, you may not get higher chances to apply for another loan, be it for home improvement or debt consolidation, or both.
Thanks to home equity loans, you can now both complete a major home project and consolidate your debt at the same time. Compared to other financing alternatives, it has longer repayment periods, lower monthly payments, and lower interest rates.
While home equity loans seemed like a very attractive financing option, the risks associated with it are higher. Considering both its advantages and disadvantages, is it the best for home improvement financing and debt consolidation? Let’s check it here.
Home Equity Loans for Home Improvements
For home improvements, home equity loans are sometimes called a second mortgage (more of this later). It’s a kind of loan paid in a lump sum within a regular monthly repayment period that may last for over a number of years. The thing is, it is a secured loan against your house or uses your property as the collateral.
Also, many borrowers would opt for home equity loans because the payment is usually structured from the start. In most cases, you pay the same fixed monthly payment with a fixed interest rate over the life of your loan. There are adjustable rates for second mortgages, though. But, of course, the fixed rate is the best since you don’t have to be concerned about market fluctuations.
What’s more, home equity loans have lower interest rates, currently about 5.85% APR. These interests are also deductible so long as the loan is used to build, buy, or improve the taxpayer’s home that’s securing the loan. Speaking of which, since equity loans are based on the collateralized home value, higher home values can profit homeowners and lenders, too.
If you know the estimated net expense of a home improvement project, a home equity loan may be the most suitable financing option for your needs. There’s no need to every time you take money out more than what’s required and paying interest on it.
On the contrary, you’ll be at a higher risk if you fall behind on your monthly payments. Home equity loans will have to use your home as your collateral. If you’ve been consistently missing payments with no valid reasons, your home could be foreclosed.
Home Equity Loans for Debt Consolidation
Likewise to home improvements, consolidating debts using home equity loans offer borrowers lower tax-deductible interest rates, as well as lengthier repayment period that can lead to smaller monthly payments.
One downside of consolidating debts through home equity loans is that lenders usually don’t lend more than the equity of the borrower’s home. Sometimes, borrowers can’t get that much money, as well.
Most of the time, lenders will look for borrowers who have a 20% equity cushion. This is the difference between what a borrower borrowed and his/her home’s value through a primary mortgage (banks, mortgage brokers and bankers, credit unions, etc.) and secondary mortgage. A second mortgage allows a borrower to borrow against his/her property value.
For instance, if you possess a $200,000-worth property, a $40,000 in equity should be left untouched. More importantly, you can potentially be eligible for an equity loan if you owe around $100,000 on your primary mortgage.
The application process of home equity loans is as easy as getting fast cash so long as you’re eligible to apply and had already prepared all of your needed financial information and required documentation in advance.
Takeaway
While home equity loans seemed like the best financing option, it may not be the best option for others. The terms and conditions of home equity loans always vary a great deal. It doesn’t only depend on the lender, but also includes a borrower’s credit score and history, as well as the money involved.
If you’re one of the people who aren’t eligible for home equity loans, don’t lose hope. Regardless of what kind of financial shape you’re currently in, there’s always a financial option that’s suitable for your needs and pocket.
