Home Equity Loan - Financial Solution or Potential Nightmare?

By: Terry Edwards

Over the years a home equity loan has become an extremely popular way to get cash for all types of reasons. From medical bills to a business start up, a home equity loan provides the help you need. But, is it your best option? Let's take a look.

In basic terms, a home equity loan lets you borrow against the equity you have built up in your home. A quick example would be if your home is valued at $100,000 and you have a mortgage balance of $50,000. You would have %50,000 of equity you could borrow off of.

Generally, most financial lenders will loan you 80% of your home's value, or in this case, $30,000.

Before taking out any loan ask yourself if you really need it. A home equity loan can make good sense if used for things like:

-Paying off medical bills

-College funding for your children

-Home improvements or renovations

-Paying off debt (with restrictions)

But using the proceeds to buy big ticket items such as cars, TV's, vacation and other things is a terrible idea. This type of spending can lead to losing your home and financial disaster in many cases.

Paying off debts with the proceeds from a home equity loan is good, but only if you permanently change your spending habits. Clearing off your charge cards only to start using them all over again will only get you into more trouble. It will take a commitment and some discipline on your part.

Other important points to keep in mind are your ability to make the monthly repayments on the loan. Default on the loan and the lender could take your home. You also want to be sure you will be living in your home for a few years after taking out a loan in order to build up more equity.

Knowing whether a home equity loan is right for you is vital in making a sound financial decision that will affect you for the next several years.

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