We’ve all had times when money was tight. Maybe an unexpected expense has arisen like a medical bill or a major home repair. Chances are that you won’t get very far with scratch-off lotto tickets, so what are your other options?
One popular choice is to get a home equity loan, also called a home title loan. Here’s a crash course on what these loans are and how to decide if they’re right for you.
What Are Home Title Loans?
A home title loan or home equity loan is a loan against the equity you have in your home.
Let’s say your home is worth $200,000. You currently owe $150,000 on your mortgage, between your down payment and the money you’ve already paid on your mortgage.
That means you have $50,000 worth of equity in your home. You can get a home title loan for up to $50,000 against that equity.
It’s important to note that a home equity loan isn’t the same as a home equity line of credit. A home equity loan, as with any other loan, gives you the lump sum up front and you pay it back little by little.
With a line of credit, the lender sets a maximum amount you can borrow. You borrow from it here and there as necessary, and you can borrow as much or as little as you want up to that set maximum.
Pros of Home Equity Loans
Is a home equity loan the answer to your cash flow problem? Here are the advantages these loans can offer.
They’re Easier to Get
With a home title loan, your home serves as collateral for the loan, just like it does with your mortgage. This gives lenders some added assurance because they have recourse if you stop paying on your loan. One way or another, they know they’ll get their money back.
As a result, home equity loans are easier to get than loans without collateral, like most personal loans. This makes an especially powerful difference for people with less-than-stellar credit.
You May Be Able to Deduct the Interest on Your Taxes
Paying interest may feel like you’re paying for nothing, but it’s the cost of having the money when you need it. In some cases, not all of your home equity loan interest will go to waste.
If you’re using that loan to make significant improvements to your home, you may be able to deduct the interest from your taxes each year.
Lower Interest Rates Than Personal Loans
As we mentioned above, your home serves as collateral for your home equity loan, reducing the risk for the lender. The lower the risk is, the less money the lender will charge for the loan.
In other words, home title loans tend to have lower interests rates than personal loans, payday loans, and other types of loans.
Remember, “lower” interest rates don’t mean “low” interest rates. Your interest rate could still be high for a home equity loan depending on your credit score and your lender.
This is why it’s a good idea to shop around for home equity lenders before you commit to one.
Cons of Home Equity Loans
We hate to be buzzkills, but before you stroll into your nearest loan office and apply for a home title loan, you need to measure the downsides too.
You May Have Less Equity Than You Realize
With a mortgage, as with so many types of loans, many people don’t realize how little they’re actually paying off with each payment.
If a large amount from your mortgage payments are going to interest, it puts less money into your equity. As a result, you may have less equity in your home than you realize.
For instance, let’s say your monthly mortgage payments are $1,200 and that $200 of that goes toward interest, whether you realize it or not. After a year of payments, some people would think they’d have $14,400 in equity because they’ve paid $14,400 on their mortgage.
In reality, only $1,000 of your payment each month has gone toward your equity. That means that after a year you have $12,000 in equity instead.
A shift in your home value will impact how much equity you have in your home too.
Let’s say a year ago, your house was worth $200,000 when you bought it. Your local housing market is failing, making the house worth just $190,000 today.
Instead of having $12,000 in equity from a year of payments (as we explained above), you have just $2,000 in equity today.
Your Home is At Risk
While getting a loan with collateral may mean an easier approval process and a lower interest rate, it puts your collateral at risk.
In the case of a home equity loan, this means that your lender can seize your home if you miss payments. With a personal loan without collateral from CashNetUSA, for instance, they could sue you for missed payments but you’d still have a roof over your head.
You Pay Closing Costs
For all intents and purposes, a home title loan is a second mortgage. You’re borrowing against the value of your house while the house serves as collateral, just like with your original mortgage.
This also means that you’ll need to pay closing costs on your home equity loan. This varies on a case by case basis, but the average is up to 5% of the loan amount. Remember that this is a loan cost on top of the interest you’re paying.
Weighing Your Loan Options
Cash flow issues can happen to any of us. No matter how much money you have saved, there’s always a chance that something will pop up that empties your savings account and then some.
If you’re a homeowner, home title loans could be a solution to that problem. The pros and cons above will help you decide if it’s the right route to take.
For more tips about finance and other important aspects of the mom life, check out more of our popular blogs.