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Avoid These 5 Home Equity Loan Risks

Avoid These 5 Home Equity Loan Risks

We’ve all seen the ads: happy couples frolicking on a beach or climbing Machu Picchu all because they decided to turn to home equity loan lenders for the cash to make it happen. But before you cross something off your bucket list using the equity in your home, we want you to consider what you could be risking.

 

While a home equity loan does allow you to borrow money against your house to get some quick cash, there are home equity loan risks that rear their ugly heads — particularly in the long-term. If you are not financially stable or have limited employment opportunities, you may want to hold off.

 

Differences Between a Home Equity Loan and a Home Equity Line of Credit

Before we really delve into home equity loan risks, we need to separate two concepts that people often think of as interchangeable: home equity loans and home equity lines of credit. Here we’ll outline some of the main differences because they are by no means the same, even if they do share similar terminology.

 

Home Equity Loan (HEL)

A home equity loan is essentially another mortgage that borrows against the equity in their home, most often at fixed rates.

 

  • You get a lump sum of money
  • The interest rate is fixed
  • Repayment of the loan is done in monthly installments and includes principal and interest

 

Home Equity Line of Credit (HELOC)

A HELOC is when you open a line of credit, similar to a credit card, and is established ahead of time how much and how often you use it. But unlike a credit card, your home is used as collateral; meaning if you fail to pay your debts, you will lose your home.

 

  • You have an open line of credit for 10 years
  • The interest rate is variable
  • Lower monthly payments during the 10 year draw period – after that, you pay principal and interest

 

The Most Common Home Equity Loan Risks

 

1. Home Equity Loan Lenders Could End Up Owning Your Home

You’re putting your home on the line by using it as collateral when you take out a home equity loan, so it is not a decision to be taken lightly. You need to know that if you enter into a home equity loan agreement you are at risk of losing your home if you are unable to pay back the loan in full and on time.

 

Before taking this step, determine whether or not you have the resources to repay the loan – and that includes fees and interest. It’s a mistake to think of the equity in your house as a cash source that can be accessed as easily as hitting the ATM. You should think of a home equity loan as a second mortgage.

 

Home equity lenders are in the business of making money. One of the ways they do that is to initiate foreclosure proceedings if you default on your loan. The more equity you have in your home, the more likely they are to foreclose because there is usually money left over for them to recover after the first mortgage is paid off.

 

Before you enter into such an agreement, you need to be sure that you are financially stable enough to pay it back.

 

 

 

Why SKYDAN Equity Partners Is a Better Alternative

If you’re experiencing financial problems and your credit has suffered, you may have a difficult time getting a bank to give you any kind of loan. SKYDAN is different. We don’t require a credit check in order to help you get back on your feet and avoid foreclosure.

 

SKYDAN isn’t a bank, mortgage company, or lender. We are a real estate investment company that partners with homeowners wanting to take advantage of their home equity through our sale and leaseback program. When you work with us, you don’t have to worry about your credit score, or making mortgage and interest payments.

 

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