What Are Home Equity Loans and Should I Get One?

Home equity loans are a type of loan in which the borrower uses their own home’s equity as collateral. These loans are very useful for financing big expenses, such as education, medical bills or repairs to your home. It creates what is called a lien against the borrowers home, and therefore reduces the actual equity of the home.

Most home equity loans require a very good to excellent credit history and a reasonable loan-to-value ratio. In some areas, these loans are referred to as second mortgages.

Many people get confused between these loans and the home equity line of credit, the difference being that a line of credit can be drawn upon for funds at any time and often comes with an adjustable interest rate, whereas a house equity loan is a one time fixed lump-sum, usually with a fixed interest rate.

As for whether or not this type of loan is suitable for you really depends on your circumstances. If you have a lot of equity built up in your home and you’d like to release some of it, then using your equity is probably a good option. Just be aware that banks view these loans as slightly more risky than other types of loans, and will therefore charge a higher interest rate. It’s generally advised to use the funds for major necessities only, as opposed to things like holidays or boats.

Conclusion

Home Equity Loans are great for those of us who have nearly paid off their homes and are looking for quick funds to renovate the home, pay off some medical bills or other larger expenses.

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