When it comes to purchasing a new home or renovating one, there are always many different options for financing it. If you have enough cash, then you might not be needing this loan; however, if your finances are tight, then this is a good option. The only way to take on a new house is through mortgage loans. And even for home improvement and repairs afterward, they are also on loans. It is the way of life here in the United States. And there is no problem with it as long as you can pay on time.
One of the most common types of mortgage loan is the home equity loan Houston Texas. But what is it? How does it work? If it is your first time to hear of it or to consider this type of loan, then here are the basics you need to know before making a decision.
What is a Home Equity Loan?
A home equity loan is a type of loan, usually taken as a second mortgage. It allows the borrower to get money based on the value of his property. Therefore, you can expect large amounts of money from this loan. And since you are using your home as collateral, it is easier to get approved as compared to other types of loans.? The home equity loan is often called as your second mortgage for a reason. The first mortgage is the loan you took out to purchase your house. Now if you have good credit, you can take out additional loans by using your home as a guarantee. However, you need to remember that there are risks of doing this. If you cannot pay the mortgage and exhausted all options, your lender will take your home as payment.
Good read: Home equity line of credit (HELOC) vs. home equity loan
How Does it Work?
So, how does it work? You have two options when taking out a home equity loan. The first one is you can get a lump sum amount up front. You can take the entire approved amount and repay your loan over a set period with fixed payments. It is a good option if you need a large sum of money for different purposes or if you want to have some spare cash around. On the other hand, you can also get approved for the maximum amount but only take the money you need. It is advisable to do this when you are not sure about your finances, or you do not need a massive sum of money.
What are the Pros and Cons?
Let us go to the benefits of this type of loan first. Home equity loans often have lower interest rates as compared to other kinds of loans. It is also easy to get approved as long as you have good credit since you are putting your property as a guarantee for repayment. Furthermore, it gives you access to large sums of cash in case you need it. It may also provide you with tax benefits. On the other hand, borrowing a significant amount of money puts you in a lot of debt which could be heavy on your pocket afterward. It also comes with different kinds of fees, so you need to be careful when choosing a lender.