by Kevin Ball
A lot of us are feeling the pinch at the moment, and the idea of taking out a loan to keep going through the tough times, consolidate other loans or just to improve your house can be very attractive. If you own your home, there are many loans available, so let’s look at some of the pros and cons of homeowner loans.
Interest rates – The key advantage of homeowner loans is an interest rate much lower than other loans. This is because they’re secured loans, where your home is used as collateral for the loan. Because you’re putting up security, the lender is willing to offer you a lower interest rate.
Security – While securing the loan against your house is good for cutting the costs of the loan, it can provide a big risk for you. If you can’t keep up the repayments on a homeowner loan, the lender is allowed to take your home in order to pay off what you owe.
Repayments – Because the interest rate on a homeowner loan is lower than it is on an unsecured loan, the repayments you’ll need to make will be lower. So if you take out a homeowner loan to pay off credit cards, then you’ll be paying less each month to clear the debt.
Flexibility – Repayments on a loan like this aren’t usually flexible, so you’ll be committed to paying the same amount every month until it’s paid off and you should budget to be sure you can afford to pay it until the loan is completely clear. Check to see if it’s possible to change the amount you repay; for instance, you may want to increase it if you get a pay rise to clear the debt quicker – and if it generates any additional charges.
Credit rating – Taking out a secured loan against your property will be recorded on your credit rating, and if you have a high level of secured debt against it (such as your mortgage) then it may make it hard to obtain additional credit until the loan has been fully paid off.
Taking out a homeowner loan is a good way to use the value of your home to generate capital for a number of uses. However, you should make yourself aware of the potential pitfalls and be sure you can afford it before applying for one.
This was written by Kevin Ball, a blogger with a keen interest in finance, on behalf of Norton Finance. You can find them on Facebook or on Twitter @NortonFinance