Looking for a way to fund new home renovations, invest in a second property, or pay for a child’s college education? A home equity installment loan might fit the bill. Consumers often turn to home equity loans as a way to finance a large expense or investment using the money they have already invested in their home, without refinancing their mortgage.
What is a Home Equity Installment Loan?
A home equity installment loan is a loan that uses the equity you already have in your home as collateral. With your home’s equity as a guarantee, lenders are willing to offer larger loans at lower interest rates than many other types of loans.
Unlike a home equity line of credit, most home equity installment loans are standard, one-time loans that are approved for a given amount and must be repaid over a pre-arranged schedule of installments ranging from three to 30 years, similar to a primary mortgage or car loan. Installment payment amounts include both principal and interest.
Lenders offer installment loans based on some percentage of your home’s appraised value, less any outstanding mortgage amounts. The maximum loan amount is calculated according to the loan-to-value (LTV) ratio, which may be as high as 80-90%. This means if your home is worth $150,000 with a $100,000 mortgage balance ($50,000 in equity), at 90% LTV you could potentially qualify for a home equity installment loan for up to $45,000 ($50,000 x 90%).
Who Uses Home Equity Installment Loans?
This type of loan can be used to finance anything from a home renovation to a wedding. Below are some of the main reasons consumers secure this type of credit:
• Finance a home renovation
• Pay a child’s college tuition
• Pay off other, higher-interest debts
• Purchase a second home or rental property
• Invest in a business opportunity
• Pay for a wedding, anniversary, vacation, or another big celebration or event
Installment loans are a good option if you have a large, lump payment that you need to make now but would like to pay off over installment loans time. They’re also ideal in a market with unstable interest rates, allowing you to lock in a low fixed rate.
Advantages and Disadvantages
There are pros and cons to home equity installment loans, and times when this type of borrowing is more suitable than others. Read on for some tips to help you determine whether this type of loan is right for you.
A home equity installment loan is ideal for a one-time purchase or investment, such as a home renovation or the payoff of a high-interest debt, where you will only need to draw funds once and are prepared to pay it back on a fixed schedule. An installment loan is probably not a good idea for frivolous purchases that may be difficult to pay back. If you default on the loan you stand to lose your home, so it’s important to be sure you’ll have the means to pay back the funds according to the agreed-upon terms.
On the positive side, because your home serves as collateral, you’ll most likely be able to get a lower interest rate than an unsecured loan – which can mean big savings in interest payments over time. Interest rates are usually fixed for this type of loan, which makes it possible to lock in a lower rate that won’t change with market fluctuations. You may even be able to count the interest as a tax deduction.
Home equity installment loans are perfect for consumers who are interested in one-time loans and are confident of their ability to repay it. They’re also a good fit for those who like the security of a fixed interest rate.