Securing a loan off of the backing of your home's equity is one way to get money for whatever you need it for. However, using a home's equity is only one way to land a loan and should you decide that you need a loan for any reason, it is a good idea to be well read in the various types of loans available and the requirements to land each one.
There are two main loan types, each applicable in a particular situation. While a home equity loan is one option, it is certainly not the only option. Before you simply go down the path of pursuing a home equity loan, please keep in mind that there are other options available that might be more applicable to your situation, options that may not necessarily put your significant real estate investment at risk as a home equity loan does.
For those that have a strong credit history, an unsecured personal loan can be a better alternative to a home equity loan as it does not require any assets as collateral. The loan is instead made based on the credit history of the person requesting the loan, making it more difficult to obtain.
Those with less-than-stellar credit histories will have trouble finding an unsecured loan, but it is possible that some lenders will go ahead and extend the loan. In these types of situations, a higher interest rate can be expected to compensate for the risk the lender is taking by offering an unsecured loan to someone that might be seen as a credit risk. Conversely, secured loans will typically see lower interest rates because of the assurance the lender has that something will come back.
Secondarily, landing a loan for the amount you're trying to get can be difficult if you have needs beyond a small loan in the $10,000 area. Because they are unsecured, loaning a large amount only amplifies the risk and is, therefore, less common. Lenders are simply wary about extending a large amount of money to a credit risk, which is to be expected.
Home Equity Loan
In contrast to an unsecured loan, because a home equity loan has the backing of your real estate, lower interest rates can be had and lower monthly payments can be managed. Of course, this comes with the risk of your property being lost in the event that you cannot pay your monthly requirement. The rate can either track the changes in the market or be fixed and the specific traits of each home equity loan are likely different.
One thing that does remain standard through home equity loans is the benefit of a lower interest and that benefit is usually the chief reason they are pursued. Lines of credit can even be taken out on your home equity and while the rate will come in higher than a loan, it can offer some flexibility if unexpected expenses are encountered.
As you might expect, the amount of money you can get through a home equity loan is usually significantly larger than you could through an unsecured loan. Because there is collateral involved, you are not as big a credit risk and lenders are more comfortable lending larger amounts.
As you go through the process of deciding what kind of loan route to take, it is important to keep in mind that there are multiple options. If you have a great credit history and feel uncomfortable putting your home's equity on the line, an unsecured loan can solve your problems. If you have some credit troubles or need a large loan amount, perhaps a home equity loan is a better fit. Either way, every loan is different, so do your homework before signing anything and you will do yourself a great service.
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