A home equity loan is a small sized loan that people can borrow on top of the mortgage loan they already have. A check is sent to you immediately of the total amount; this is on approval of your loan application. It is the type of loan that comes in handy during situations of emergencies ant there’s no cash lying around.
Take the example of a home improvement project and the whole basement flooded. These repairs will cost a fortune! However, a home equity loan could be what you need. Home equity loans have the advantage that interest rates stay constant in most circumstances.
There are two types of home equity loans; open ended and closed ended. The major setback when it comes to home equity loans is that payment begins as soon as the end of the first month. There are lenders that provide the client with as much as 125% of the home’s market value. Failure to repay this usually means your house will be auctioned off.
Home improvement loans have lower credit limits, and this is because of the purpose of borrowing them. It has various uses, but as the name suggests, it is a casual loan borrowed and used to purchase upgrades for your house. If the kitchen needs to be remodeled and you do not have enough money in the bank, applying for a home improvement loan might be in the best interest for you.
These usually have the advantage of having a less stringent repayment program. They almost always have no prepayment fees charged on early repayments. They also have the advantage of always having a fixed interest rate; these, however, do have a requirement of third parties. A home improvement project will need a quote of a specific amount. At the same time, show the proof that the price quoted for the loan is at a reasonable budget.
In most cases, the loan borrowed is paid directly to the contractor hired without going through the homeowner. There it has to be a properly detailed between the homeowner and the contractor on how the home repairs will be fixed. This tedious process does not exist when borrowing a home equity loan. A perk about a home improvement loan is, the payments do not begin unless the home improvement project is completed.
A home equity loan has a few advantages compared to a home improvement loan, and they include:
There is no need to find a third party to approve the numbers you are quoted on for your loan application. All you need to do is have sufficient equity, and any amount you borrow is going to reach you in full amount. The home improvement loan increases the burden on the loan borrower as they have to prepare a detailed report of the stages involved in the improvement project. Also, at the same time find out what each stage is estimated to cost.
In some occasions, failure to make regular payments will result in the bank taking your home. The house you live in has a market value, and it is that value that the bank uses to estimate how much your mortgage will be. If your home equity loan and the size of your mortgage greatly surpass your home’s market value, then you face this risk. Your best option, when faced with the question of which loan to choose from, is to try and estimate the cost of your home repairs.