Owning a home has its perks: It’s a place that’s your own, where you can putter around a garden and paint the walls whatever color you like. It’s also an asset like no other, one that can open many financial doors for you.
Homes can earn equity, which is the difference between the value of your house and what you owe on your mortgage. A home equity loan lets you convert that equity into cash you can use in a number of ways.
How home equity loans work
A home equity loan, sometimes called a second mortgage, is a loan that is that’s backed by the value of your house. It’s an installment loan, like your existing mortgage or a car loan. You receive the money in a lump sum up front and have fixed monthly payments determined at the outset.
Home equity loans are different from home equity lines of credit, or HELOCs. The latter is more like a credit card: You have the ability to draw on the funds at your discretion. Payments are calculated based on the amount and time when funds are borrowed and on the interest rate, which usually is variable.
Home equity loans compare favorably to other types of loans …
- The interest rate is generally low, and interest payments can be partly tax-deductible.
- The more equity in your home, the more you’re likely able to borrow.
- It can be easier to get approved for a home equity loan than for a personal loan.
… but there are some points to think about …
- You are putting up your home as collateral — fall behind on your payments and you risk losing it.
- It can be harder to sell a home that’s carrying the added debt of a home equity loan.
- Credit requirements may be higher than for, say, a credit card.
How you might use a home equity loan
You have the freedom to use a home equity loan in many ways. Some fairly common examples include:
- Making home improvements or repairs
- Covering medical expenses
- Consolidating higher-interest debt
- Paying for college
- Taking a vacation
- Starting a small business
Taking out a home equity loan is a big decision, but it’s one that someone at a financial institution such as Service One Credit Union can walk you through, answering your questions and helping you make sure the move is right for your financial goals.Devan Goldstein, NerdWallet
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