The Benefits & Drawbacks of Equity Lending for Debt Repayment

Most homeowners often focus on building equity in their homes so they can easily secure a home equity loan whenever needed. However, only a few understand the benefits and drawbacks of this loan. If you are new to equity lending for debt repayment, we have discussed how this loan works, including the common pros and cons. To learn more, call us today!

Understanding Equity Lending for Debt Repayment

Home equity loans are a form of equity lending for debt repayment where you, the homeowner, secure a loan from a bank or private lender against the equity in your property. In other words, you use the value of your home, less any outstanding mortgage, to secure a loan. If your home is worth $800,000 and you have an outstanding first mortgage of $300,000, the lender will give you a loan worth 80-85% of the equity. Here, the equity in the home will be $500,000, i.e., ($800,000-$300,000).

Benefits of Equity Lending for Debt Repayment

There are several benefits of taking a home equity loan. One is that you can easily access the funds whenever you need them. Most banks and private lenders will approve your second mortgage if you have enough equity and a good credit score. The other obvious benefit is the low-interest rates, making this loan very affordable. Here are the other benefits of equity lending for debt repayment: 

• Flexibility. You can use your home equity loan to consolidate debts, pay bills, expand your business, or finance any project. 
• Higher loan amounts. Compared to other loan types, equity lending for debt repayment allows you to secure a bigger loan depending on the equity you have built in your home. 
• Improved credit score. If you use equity lending to consolidate loans, you will enjoy better debt and finance management. The on-time payments will boost your credit score.   

Drawbacks of Equity Lending 

Like any other loan, equity lending for debt repayment has its drawbacks. The extent of these drawbacks will largely depend on the type of lender you choose. For instance, a reputable lender offering competitive rates and favorable terms would make your loan more affordable in the long run. That said, here are the common drawbacks of equity lending for debt repayment.

• Risk of Foreclosure. With equity lending, failing to repay the loan in time increases the risk of default. This could lead to foreclosure and, eventually, property loss. Before taking a home equity loan, ensure you have a strategy for paying it back.
• Decreased Liquidity. When you take a second mortgage, you are eating into your home equity, making it harder to access cash or another loan in the future. Always plan how you will meet your financial obligations after using your home equity. 

Make Your Choice Today 

Home equity lending for debt repayment can be a great financial tool for homeowners seeking instant cash. However, it’s necessary to consider the pros and cons before making a major decision. Whether you own just your primary home or multiple properties, always consult a financial advisor before accessing the equity in your property. That way, you can benefit from professional advice and even guidance on how to pick the right lender. Call BMC Mortgage & Investments to learn more today.