There are times when individuals need to look for different alternatives of raising funds and are saving to meet certain goals. During such times, people turn to their existing investments for help. Many people have investments in the form of property or a house in which they currently reside. Generally, property like a house appreciates in value over a period of time and this tempts many to avail home equity loans. After all, home equity loans have low interest rates, are long term loans and require small monthly repayments. After taking into account all these benefits, borrowers feel that by availing a home equity loan they will be utilizing the locked-up value of their abode and will be able to meet their short term needs easily and quickly.
However, opting for a home equity loan is a big decision and should be taken after much thought, as, in case of defaults in loan repayments the lender gets to forfeit the house (which is kept as collateral with the lender). The following are the important factors which should be evaluated well before taking a home equity loan:
Its effects on retirement plans
Individuals who want to take a home equity loan must contemplate the results of this decision wisely. This kind of loan is typically seen as useful source of raising funds for senior citizens in their post retirement phase, when they face emergencies or when a need arises. If young borrowers avail home equity, it could have an adverse impact on their long term financial plans including their post retirement plans.
Another important factor to be kept in mind is the repayment capacity. Borrowers going in for this kind of loan should be certain that they will be able to pay the monthly installments towards loan repayments. For this, they must have adequate sources of funds to service the loan every month on its due date; otherwise, they stand to lose their house since the loan has been secured on the house.
Should be considered as a last resort only
Borrowers must not avail this loan to finance consumption or lifestyle needs. Such expenses can be delayed or can be met from regular income by a little planning and a combination of saved funds and personal loans. Those who are looking for secured loans (as they have lower interest rates than personal loans) can opt from various less risky alternatives like loans against cars, loans against fixed deposits or loans against securities.
Can be used to repay other loans, but cautiously
Borrowers should finance the repayment of other high-cost loans, like credit card balances, by availing a home equity loan only if they firmly decide to stay away from similar situations in the future. Meanwhile, they should know that by financing repayments of loans by taking a home equity loan, they are only replacing unsecured credit with a secured credit, having longer tenure. On top of that the penalty of non-payment or late payment is more serious in this case. So, borrowers should first try to pay off their debts by using own funds such as their savings and income.
Generating funds for investments
Sometimes, people take equity loans to generate resources for investment purposes. In such cases, the income from investments must be higher than the cost of borrowing and should earn enough additional returns also. However, if the investment fails to perform as expected, borrowers will not have to afford cost of the loan, they may also lose their house, leaving them in a worse monetary situation.
It is advised that equity on one's house should be reserved for meeting financial emergencies, like medical expenses, or should be used to fund an important aim, only if borrowers repay the loan as quickly as they can.