Home Loans are the most popular means by which homeowners can use their home as collateral for a loan. Basically, a homeowner uses the equity in his or her home, to borrow money against it, which may be used for any number of purposes, whether it is to fund their kids' college education or to finance a home renovation.
However, some people are known to go on a spending binge soon after getting the loan - purchasing luxury handbags, designer clothes and even gambling away the entire capital on a trip to Las Vegas - this defeats the purpose of getting a home loan. As an accountant, you should strictly advise your clients against that.
Understanding Home Loans
While you may be familiar with primary mortgages, home loans are not the same. Home loans are in addition to the primary mortgages, which allow one to raise capital based on the equity that has been built up in their home. In fact, getting a home loan is a lot easier than getting a regular mortgage and it doesn't take one long to successfully apply for, qualify and then get a home loan. Homeowners are generally very surprised at the speed at which they gain access to the money from these loans.
How is the Amount of Equity Calculated in Home Loans
The amount of equity in a home is what a homeowner will get after subtracting their outstanding mortgage debt from the total value of the home. Most lenders are perfectly happy allowing homeowners to borrow an amount equal to their home equity or close to it – but that may depend on the lender and how they evaluate their personal financial circumstances. You should advice your clients to shop for the best lenders offering the best rates.
How can one use the Home Loan
You can tell your clients that they are allowed to spend the money got from their home equity loan any way they see fit and for any purpose. This is completely dependent on their discretion. Most people use the capital got from these loans to buy a car, sponsor a kid's college education, and for home renovations.
The smartest borrowers make sure that they do not overspend the money got from these loans, and keep their spending well within reasonable limits. Why is this important? Well, when one takes a home equity loan, they are basically offering their home as collateral. That’s why it doesn’t make sense for anyone to risk losing their home by defaulting on their loan.
What Are The Advantages And Disadvantages Of Taking A Home Loan?
The advantages are that, these loans offer a very economical and simple way to finance a major financial requirement, as discussed earlier. Also, the interest on these loans is tax deductible in some (but not all) cases.
The disadvantages are that, since home loans are so easy to get that it is possible that one might be tempted to borrow too much money and also to spend more money than reasonable, especially keeping one's financial circumstances in mind. So, there is always an inherent risk in these types of loans.
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