21 Aug Advantages & Disadvantages of Home Equity Loan

Are you planning to apply a home equity loan? If yes, it’s better to stay aware of its advantages and disadvantages before applying to avoid any last minute surprises. A house equity loan is a loan secured by the borrower against their existing property and provided by a financial institution or a bank or lender. Equity is defined as the difference between a home’s current market value and the remaining mortgage balance. As the mortgage is paid, the homebuyer gains equity in their property, which can then be used to secure a home equity loan in Abbotsford.

Advantages of Using Home Equity

• Low Cost Financing

A home equity loan offers a low-cost source of finance that does not distract from your long-term wealth creation efforts. It prevents you from digging into your savings or selling off portions of your investment portfolio.

• Low Interest Rate

When it comes to lending or financing, a house equity loan is secured by the value of your residential property as collateral and possesses less risk to a lender. Interest rates on property equity loans are typically cheaper compared to ordinary unsecured personal loans or credit cards.

• Boost Credit History

Once a home equity loan is approved and the borrower begins making principal and interest payments, they can increase their credit score if the lender reports the loan. 

• Size of Principal

If the value of your property has increased significantly from the time of purchase, you may have a sizable amount of principal that you can borrow from using a home equity loan. This loan allows you to use a portion of your net worth that would otherwise be difficult to access.

Disadvantages of Using Home Equity Loans

• Investment Risks

Home prices are not necessarily guaranteed to increase over time. If homeowners have purchased an additional property with equity during a market downturn, they may find themselves underwater on numerous properties.

• Power of sale or foreclosure

When a home equity loan is arranged, the underlying property serves as collateral. As a result, if loan payments are not paid, the property can be taken through a power of sale, or ownership can be transferred to lenders. As a result, it is critical to conduct enough due diligence to ensure that you, as a borrower, are financially able to make the monthly payments, which are often interest-only on many property equity loans.

Conclusion

A home equity loan can turn out to be a useful financing tool for additional properties and/or home upgrades. However, before making such a commitment, you should consider your options with a mortgage broker in Abbotsford and ensure that you have the monthly cash flow to cover both the loan and your mortgage on time.

If you are looking for a reliable mortgage consultant in Abbotsford who can help you with home equity loans, rely on none other than Satbir Bhullar. For more details, give us a call today.