Home Equity Loans

A home equity loan is a type of loan that enables you to use the equity you’ve built in your home as collateral to borrow money. Like a primary loan used to buy a house, your home is used as security to protect lenders if you end up defaulting on your loan.

Home equity loans are often called second mortgages because you have another loan payment to make on top of your primary mortgage.

 

Pros And Cons Of Home Equity Loans?

 

Before you decide to get a home equity loan, you should be aware of the pros and cons. Consider your financial circumstances to determine whether the advantages outweigh the disadvantages.

 

Pros

• They are easier to qualify for than many other types of loans
• Interest rates are usually fixed and lower than many other consumer loans.
• Terms are longer than many other consumer loans.
• There are no restrictions on how you can use the funds.
• You can access the funds immediately in a lump sum.
• Monthly payments are fixed, making them predictable.

Cons

• You’ll have a second mortgage to pay off on top of your primary mortgage.
• You risk forclosure should you default on the loan.
• If you sell your home, you’ll have to pay off the entire balance of the loan – as well as the remaining balance of your primary mortgage – as soon as you close.
• You’ll have to pay closing costs unlike some other consumer loans.
   

If a home equity loan doesn't seem quite right for you, you may still have other options for leveraging your home equity. For example, a cash-out refinance might be a better choice for you. Try exploring your options to figure out what financing path works best for you and your current mortgage.

 

When Is A Home Equity Loan The Right Choice?

 

Home equity loans aren’t perfect but they can be a great choice for some homeowners. Here are a few situations where a home equity loan makes the most sense:

• You need a lot of money fast: A home equity loan is a good choice when you need a large amount of money immediately but want to lock in a lower interest rate than you’d find with a credit card or personal loan. Since interest rates are fixed, you’ll know how much you’ll owe each month so you can budget for your monthly expenses with ease.
• You have a strict, fixed budget: Home equity loans can be the right option when you have one specific expense and are aware of the full amount that you’ll need to spend on it.
• You’re paying off higher-interest debt: They’re also the better choice if you want to use the funds to pay off other debts that have higher interest rates, as you’ll know your rate won’t change.