What’s a home equity loan?

houseYour home is the biggest investment you will probably make in your lifetime. Did you know that you can use your home’s equity to help you finance things like home improvements, purchasing a new car, paying college tuition or consolidating bills?

A home equity loan allows you to borrow against the value of your home. It is an additional mortgage on your home. The first mortgage is the one you used to actually purchase your home. This second mortgage, i.e., your home equity loan, borrows against the property if you have built up enough equity in it.

Why would you want a home equity loan? Are there any benefits?

  • Home equity loans typically have a lower interest rate (APR) than other types of loans you may need when you need extra cash for something
  • They may be easier to qualify for because your home becomes your collateral
  • The interest on your home equity loan may be a tax deduction, but you should talk to your personal tax advisor for details
  • You may borrow larger sums of money depending upon how much equity you have in your home

Home equity loans are typically fixed rate loans which you repay over a certain period of time with fixed monthly payments. A home equity line of credit is works like a credit card – the rate is variable and you can continuously loan yourself money as you repay your loan. These may come with a promotional rate up front and after a certain period of time, the rate may increase to a non-promotional rate that is in existence after the said promotional period.  Your loan officer should explain those differences to you when you apply.

How much of your home’s equity you can borrow may vary. Some lenders may allow up to 100% of your home’s equity, others may limit you to 70% or 80%.

How do people use a home equity loan?

Essentially, if you need money and you have the equity in your home, you can use the money for whatever you need. Most people may use it for larger expenses such as weddings, education, remodeling/renovations, fund the purchase of another home, and the ever-popular, consolidating debt. It all depends on you, your needs and whether or not you want to tap into the money you have available in your home.

Are there risks to using your home’s equity?

Yes. If you fail to replay your loan, you could lose your house.Taking out a home equity loan should be a well thought out decision and used for the most important expenses. Talk to your loan officer about other fees associated with obtaining a loan such as points, closing costs and pre-payment penalties. Also, ask about whether or not you can obtain some kind of insurance on your loan in the event you have a health-related issue and cannot work, you lose your job or if you die so your payments are covered.

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