Home Equity Loans: Benefits & Drawbacks

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From major home renovations, to having to buy a car, the need to pay for a child’s college education or countless other things, there are many reasons why homeowners find themselves in need of money. But when it comes to financing life’s expenses, running up credit cards or taking out a loan may not be your best bet. If you have equity in your home, odds are good that your cheapest form of financing is through a home equity loan, which is basically a second mortgage on your house.

            Just as its name suggests, a home equity loan is a loan taken out against the value of your home, where a lender uses your property’s value as an underlying way of securing the loan’s repayment. The amount you can borrow against your home’s value is determined by the underlying value of your home and the percentage of your mortgage that has already been paid off. Since such loans are lower risk for lenders because of their ability to foreclose on your home should you default, home equity loans are typically easier to qualify for and have lower interest rates than other types of loans or other financing options such as credit cards. All of these factors have long made home equity loans a popular form of financing.

            With interest rates for most credit cards being much higher than the average 15-year home equity loan, home equity loans can be an attractive way of paying down debts –possibly even paying off higher credit card bills. But don’t forget that, while home equity loans are often easier to get, they are not without risk. And if you do choose to take out a home equity loan, make sure not to take out more than you truly need –despite the ease of pulling money from your home.

Failing to repay a home equity loan won’t just affect your credit score, it could ultimately mean losing your home. As with all loans, home equity loans still involve closing costs, so don’t forget to factor that into what you’ll ultimately be borrowing/repaying the bank. Also, keep in mind that taking out a home equity loan, especially a home equity line of credit (HELOC), will have an impact on your overall credit score, much in the same way as maxing out your credit cards.

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