What Is a Home Equity Loan?

An equity home loan is a type of loan in which the borrower uses the equity they have in their house to get a new loan. These loans have growing popularity because they offer a lower interest rate than unsecured loans and can be used for a variety of purposes, including home improvements, debt consolidation, or investment. Here, we will give you an in-depth review of how this whole process works.  

House equity loans are a type of loan in which the borrower uses the equity of their home as collateral. These loans are usually taken out as a sort of the second mortgage. The amount you will be able to secure this way is based on the current value of the home, minus any outstanding mortgage debt. Many people decide to take this loan so they can make home improvements or consolidate other high-interest debt they accumulated.   

Home equity loans are commonly available in two forms: as a lump sum payment and as a line of credit. With a lump sum loan, the borrower receives the entire loan amount all at once and repays it over a predetermined length of time, typically 5 to 15 years. A line of credit, also known as HELOC, operates similarly to a credit card in the sense that the borrower can withdraw money as needed up to a certain limit.   

Both kinds offer loans with fixed interest rates, which guarantee that the payments will remain the same each month for the duration of the loan.  

If you’re considering taking out this loan, it’s important you first take time to understand how does a home equity loan work and what some risks are. Make sure to talk to your financial advisor to get all the information you need before making a final decision.

How Does a Home Equity Loan Work?

Borrowers who need money but still have a mortgage to pay off, opt for this loan as a quick and easy solution to financial troubles.  

Once you gather all the documents and know how much of your mortgage you actually paid off, you will know exactly how much you can take out.   

After you submit all the paperwork and get approved, you will soon start to pay off your loan in monthly installments.  

Home equity loan interest rates are usually between 6.34% to about 8.5% but they can be significantly lower or higher depending on the lender.  

If you need it, you can also find a home equity loans calculator online to help you get a better estimate of your options.  

What Are the Requirements for Home Equity Loans?

If you’re considering a property equity loan, there are a few things you should know about the requirements. First, home equity loans are available to homeowners with significant equity in their homes. Equity is the portion of your home’s value that you own outright, free and clear. So, if for example you have a home that is worth $300,000 and you have $100,000 in outstanding mortgage debt, you have $200,000 in home equity.  

In case you just took out a mortgage and bought your home, you will likely be rejected as you haven’t paid enough of your mortgage debt. Most lenders will require that you have at least 20% equity in your home. If you are just a little short on this, there may be some lenders willing to work with you, so don’t get discouraged.   

In addition to this, you will also need to have a good credit score and a strong history of making payments on time and in full.  

Home Equity Loan vs. HELOC: What’s the Difference?

When it comes to home equity loans and HELOCs, many people think they are actually the same thing. But before taking out either of the two types, borrowers need to be aware of a few significant differences between them. We actually already discussed this and explained that a HELOC vs home equity loan is a line of credit that allows borrowers to withdraw funds as needed up to a certain limit.

They also have shorter repayment terms and borrowers are only required to make interest payments on the amount of money they actually borrowed.  

On the other hand, a home equity loan is a lump sum loan that is repaid over a fixed period of time, usually 5-15 years. It offers a lower interest rate because it’s considered a safer option, having the house as collateral.  

Which one then is best for you? Your specific needs and your financial situation actually determine what you should do. A home equity loan can be a better choice if you require a significant sum of money at once and are able to make consistent monthly payments. As opposed to that, if you are fine with having an account you draw money from, as needed, HELOC may be the better option.  

Home Equity Loans: Pros and Cons

When it comes to borrowing money from your home equity, there are both pros and cons to take into consideration. Before making a decision, weigh them out.  

Pros  

• A great way to finance a major home improvement project, consolidate debt or pay for unexpected expenses.   

• The interest rate is much lower than the rate on a personal loan or credit card.  

• You can deduct the interest you pay on a home equity loan from your taxes. 

• A home equity loan can give you a lump sum of cash all at once, which can be helpful if you need to make a large purchase.  

• Monthly payments on these loans are fixed, so you will know exactly how much you’ll need to pay.  

Cons  

There are a few potential disadvantages to taking out a home equity loan that borrowers should be aware of:  

• This loan is secured by your home, so you could end up losing it if you are unable to repay the amount you took out. 

• The interest rate will be higher than on a traditional mortgage.   

• If you take out a home equity loan and later decide to sell your house, there is a chance you will have to pay back the entire loan in order to sell the property.  

Ultimately, whether or not a home equity loan is right for you will depend on your personal circumstances. So, don’t jump the gun and think about these benefits and drawbacks carefully.

Are Home Equity Loans a Good Option?

While home equity loans can be a good way to finance a major purchase or consolidate debt, they also come with some risks. Don’t forget that these mortgage equity loans have shorter repayment terms than other types, so you’ll need to be sure you can afford the monthly payments. Finally, remember that your home equity is at risk if you default on your loan.  

With that being said, home equity loans can be a good option for borrowers who are comfortable with the risks and who need cash for a specific purpose. If you’re thinking about taking one out, talk to your financial advisor to see if it’s the right move for you.  

Final Thoughts

As we thoroughly discussed in this article, home equity loans can be a great option if you are currently paying off your mortgage but need money to finance something. But before you sign on the dotted line, be sure to do your research and understand all the terms and conditions associated with them. By taking the time to educate yourself and research the best home equity loans, you’ll be better equipped to make a decision that’s in your best interests. Take into consideration the equity you have in your home and what kind of repayment schedule you can afford as well.