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Finance a Home Repair With a Home Equity Loan

If you are looking for ways to finance a home repair, considering a home equity loan could work for you. First of all, you have to know what a home equity loan is, and before you decide on leveraging on your home’s equity, you also would need to know the benefits and pitfalls of home equity loans.

A home equity loan is a type of loan in which you use the equity in your home as collateral. Home equity loans are often used to finance major expenses such as home repairs, medical bills, or college education. A home equity loan reduces actual home equity by creating a lien against the borrower’s house. In other words, this type of loan is really just a second mortgage.

What makes a home equity loan interesting is that it carries several benefits, (and sometimes pitfalls) for the home owner. Depending on how you use it, a home equity loan can either help you or make things worse.

There are two types of home equity loans:

  • Fixed-Rate. This variety sees the amount you pay and the interest rate remains constant for the duration of the loan.
  • HELOC (Home-Equity Line of Credit). This is the more complex of the two as the rates can vary. Your spending limit is pre-approved and you do your transactions through a credit card, or the use of special checks.

Both types of home-equity loans have fixed or set terms (5-15 years), at the end of which full payment should be made. Full payment of the balance is also expected if ever the subject house is sold.

Below are some benefits and pitfalls of home-equity loans:

  • Benefits of Home-Equity Loans:
    • Can consolidate debt
    • Can finance a home repair, or any other similar action
    • Offers lower interest rates compared to other loans
    • Offers tax deductible interest
    • Provides easy acquisition of cash
  • Pitfalls:
    • End result is you will pay more over the life of the loan (125%)
    • Leads to “reloading”, which is a cycle of borrowing to pay off existing debt
    • Provides a deceptively easy solution to financial problems

Of course, there is a right way and a wrong way to use home-equity loans. It all depends on the attitude and discipline of the borrower. The benefits offered by a home-equity loan can really work for you if you stay within your financial capabilities. With research, a solid plan and reasonable financial standing, the low interest rates and tax deductibility offered by home-equity loans can certainly work to your advantage.

However, if you are only interested in the quick payout aspect of this type of loan, then you may fall into the ‘reloading trap’. Reloading is when a borrower develops the habit of taking out a loan to pay off a previous loan and then uses the balance remaining to buy other items, which then leaves them in need of money again. It creates a vicious cycle that will ultimately bury you deeper in debt. If you are looking to finance a home repair and this is the first time you have applied for a home equity loan you should know this, but also understand that financing a home repair is certainly a legitimate and common motivation for pursuing a loan.

If you already have a mortgage and you are contemplating a home equity loan to finance a home repair, be sure to evaluate your financial status and capabilities, as well as your understanding of the terms of the loan before you actually apply for it. Contacting a real estate professional can help ensure that you are thoroughly prepared to go forward with your plans.