Financial Education: Loan to Own

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Other Secured Loans

Examples of other secured installment loans include:

• Loans secured by the purchased item -- similar to a car loan, your purchase is the collateral, and
• Loans secured by an asset that is not being purchased, such as home equity loans, loans secured by savings accounts, etc.

Let’s go over some details about home equity loans.

If you own your home, you have the option of borrowing against the value of your home. This is called a home equity loan. Home equity loans can be used for almost any purpose. Many homeowners use home equity loans to consolidate higher interest loans or to make home improvements. In addition to installment loans, many lenders offer home equity loans in the form of lines of credit. Lines of credit are open-end loans, like credit cards, that allow you to make multiple withdrawals up to a certain limit. For this section, we will focus on closed-end home equity loans.

There are some advantages of borrowing against your home. For example:

• Lower interest rates
• Interest might be tax deductible (check with a tax preparer to clarify if the interest will be deductible.)

The dangers of borrowing against your home are:

• If you cannot make your monthly payments, you could lose your home. Because of this danger, there is a law that gives borrowers three days to reconsider a signed home equity loan agreement and cancel the loan without a penalty. This is called ‘right to rescind’ or ‘right to cancel’ and this applies when you use your primary home as collateral.

Many home equity loans are used to make home improvements. If you decide to use a home equity loan to make improvements or repairs, be careful.

Home Equity Loan Tips

• Don’t agree to a home equity loan if you don’t have enough income to make the monthly payments.
• Don’t let anyone pressure you into signing any documents; read and understand the closing papers carefully. Don’t be afraid to ask questions.
• Remember to shop around for the best rates.
• Remember, all home equity loans that are secured by your primary home have a three-day cancellation period. This means you have three days to change your mind.

To get more information on home improvement, including how to hire contractors, how to understand your payment options, and how to protect yourself from home improvement scams, read the FTC brochure, Home Sweet Home…Improvement. The brochure can be found at the FTC website.