Three Home Equity Loan Myths Owners Should Overlook
Posted on: 2 November 2022
A home equity loan offers a way for homeowners to gain access to the equity they have earned in their home. This equity can then be used to do anything from pay off debts to home renovations. While these loans and their parameters are rather straightforward, there is a great deal of misinformation involving them. If you are on the fence about getting a home equity loan, make sure you can identify what information is not accurate.
Unreasonable Interest Rates
A common misconception associated with home equity loans is that their interest rates are unreasonable. One reason this myth arises is because people think these loans are unsecured. However, a home equity loan is secured by the verified equity in your home, which often also means that you have access to a lower interest rate.
The reason for this is that in the event the borrower defaults, the lender knows that they can tap into the equity for repayment. Debt and credit conditions are additional factors that impact interest rates, so keep this in mind.
Long-Term Home Ownership
The basis of a home equity loan is that the borrower must have earned enough equity in their home to borrow against. When you look at it this way, it is easy to assume that a borrower will need to have owned their home for quite some time, but this is not always the case.
Home equity is not just influenced by age. The purchase price of the home, the current housing market, and even interest rates can all influence the value of a home, and therefore, the amount of equity the owner has. Even if you have not lived in your home for quite some time, do not assume that you do not have enough equity to secure a loan.
HELOC Comparison
A home equity loan and a home equity line of credit (HELOC) both allow borrowers to tap into the equity they have earned in their home, but it is important to be able to distinguish the two, as they are not the same. The greatest difference is that a home equity loan is a one-time find disbursement, whereas a HELOC is more of a revolving access to funds.
Also, because a HELOC is revolving, it often has fluctuating interest rates. However, since a home equity loan is a one-time disbursement, the interest rate remains the same throughout the repayment term.
If you need additional information about the home equity loan, be sure to speak with a finance professional for details about your situation. Click here for more information on home equity loans.
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