A home equity loan is a loan that you borrow against your house.
Essentially you reduce the equity in your house by borrowing some of the money you have already paid into the mortgage.
If you’ve already built up some equity in your home or investment property, you can set up a line of credit. With these funds you can buy another property, invest in shares, take a break from work or plan a great adventure.
Most lenders offer a form of home equity loan, but there are several names and products on the market.
A home equity home loan simply involves a lender assessing the value of your home and your debt obligations and offering you a certain percentage of that equity to use.
Unlock More Secrets: Capitalize on your home’s value? We’ve got the answers. Uncover the nuances by exploring our detailed article on buying a house with equity.
Pros of high equity loans
The biggest advantage to a home equity loan is that you have a large amount of money at your disposal when you really need it.
If you have a great business opportunity that may soon evaporate, or you are short on your child’s college fund when he or she is ready to begin his or her undergraduate education, or you want to make improvements to increase the value of your house, having this extra money can be a great benefit.
Another advantage is that you may be able to make that money work for you in a way that it cannot if it is just sitting in your house.
In other words, if you can invest the equity in your home, the amount you earn may outweigh the amount you save in interest by paying down the mortgage.
You may also find, if you are lucky, that the terms of the second mortgage are better than the terms of your first mortgage, so the simple act of refinancing may save you money (although the fees for the transaction must be considered).
Cons of home equity loans
The biggest disadvantage to a home equity loan is that you are putting your house on the line.
As many mortgage holders learned over the past couple of years, this is not something to be taken lightly.
If you are not able to make your mortgage payments, you can lose your house. In addition, some home equity loans can work on a scale where early payments are affordable but later ones are much higher.
If you are not prepared for the higher payments you could have a real problem.
You may also not be sure how much you need to borrow. If this is the case, to avoid taking on additional interest payments, you may wish to consider opting for a home equity line of credit instead.
