If you have a lot of equity in your home, it often makes more sense to take out home equity loans rather than a personal loan. Though this does attach more debt to your house, it's usually a more flexible financial instrument. Here are a few of the advantages.
1. Your Credit Requirement is Lower
A personal loan generally requires a very high credit score. Personal loans are not secured loans; if you default on it, the lender has no choice except to simply try to collect their debt. A secured loan like a home equity loan, on the other hand, gives them more recourse. If you default, they can place a lien on your home (though all this will do will prevent you from selling the home without paying them off). Because it's lower risk, the requirements are lower.
2. Your Interest Rate Will Be Less
Likewise, your interest rate is going to be less. Personal loans often have notoriously high interest rates -- usually they are higher than nearly everything except for payday loans and credit cards. Home equity loans tend to be just a point or two above your home mortgage. It may be even lower if you've established a relationship with the mortgage company; mortgage companies will reward their better borrowers.
3. You'll Have More Time to Pay It Off
A home equity loan often gives you more time to pay it off than a personal loan. Most personal loans are for anywhere from one year to three years; they're intended to be very short term, again because of the risks associated with them. Home equity loans can sometimes take as long as ten years to pay off, and if you later refinance your home, you may be able to roll it into the mortgage.
4. Your Credit Will Look Better
Home equity loans also tend to improve credit scores more than personal loans. This is because debt associated with a home (secured debt) is usually considered to be a "better type" of debt than installment loans, which are unsecured. The fact that the loan will require a lower monthly payment (because it will be a lengthier term loan) will also improve your debt-to-income ratio for lenders.
Whether you're trying to buy a boat or spend money on the vacation of a lifetime, a home equity loan can be a very useful tool. You can contact your lender to find out more information about whether you can qualify and the rates that you would qualify for.Share
19 June 2017
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