Home equity loans have become increasingly popular in recent years, but what is a home equity loan, and what are its advantages and disadvantages?
What Is a Home Equity Loan?
The term "home equity loan" actually refers to two different types of loans: the home equity loan and the home equity line of credit. Both allow the borrower to take out a loan against the equity (the value of the home beyond what is currently owned) in his or her home. Where these loans vary is in how the money is distributed.
A home equity loan (HEL) grants the borrower money in one lump sum, where as a home equity line of credit (HELOC) grants the borrower access to a line of credit (much like a credit card) that can be accessed over time on an as-needed basis.
Common Home Equity Loan Uses
Home equity loans can be used for a variety of purposes, but the most common include:
The Good and Bad of a Home Equity Loan
To decide if a home equity loan is right for your needs, it's important to consider the pros and cons of such a loan.Pros
Shopping For a Home Equity Loan
If you decide that a home equity loan is right for your financial needs, there are several questions you'll want to ask potential lenders to ensure that you are getting the best deal possible. These include:
For a clear picture of the closing costs associated with a loan, insist that your lender draw up a good-faith estimate. This will provide an itemized report of all anticipated costs.
Closing the Deal
A home equity loan can be a valuable financial tool when used responsibly and with full understanding of all of the risks. Make sure you understand the terms of your loan offer before signing anything. A few questions could be the difference between a good loan and a really bad one.
One of the most popular sources of consumer credit over the last decade is borrowing from a credit line taken out against the equity in the home or home equity loans. Lenders will give a set amount of money to homeowners who have built up enough equity in the property in exchange for a lien on the home. When it comes time for you to sell your house, its important to know what needs to happen in order to ensure your adjustable or fixed rate home equity loans are satisfied in full.
If much of your wealth is tied up in your house, a home equity loan can enable you to use some of that capital to take care of your immediate needs, without having to sell your home.
Many readers of One Paycheck at a Time have asked the question of whether it makes sense to consolidate credit card debt into a home equity line of credit or home equity loan. In this interview, Dwight Crawford, a licensed loan officer, answers these mortgage loan questions.
If you're a homeowner, you can borrow against the value of your house through either a home equity line of credit (often called a HELOC or a line) or a home equity loan (often called a HEL or loan). Both are essentially a second mortgage.