Here’s How a Home Equity Loan Works
If you’ve owned your home for a while, you might be sitting on more than just a comfortable couch and a freely customizable space. Even if you’re still paying the mortgage, your house can be a potential source of funding.
A home equity loan is what you can borrow on your home equity, which is why it’s often referred to as a second mortgage. You could renovate your kitchen, pay off high-interest debt, or finally build your dream backyard with this type of loan.
And all that may sound exciting, but before jumping in, it’s important to know how exactly the loan works.
What Is Home Equity?
Equity is the difference between what your home is worth and how much you still owe on your mortgage. Think of it as the part of your home that you actually own and have paid for.
For instance, if your home is worth $300,000 and you owe $200,000 on your mortgage, then you have $100,000 in equity. Now, if you apply for a home equity loan, you can borrow against that amount of $100,000.
Most equity loan providers charge a fixed interest rate and monthly repayments after you receive the loan amount in full and at once. Some providers, like AmeriSave, even offer flexible repayment periods so you can pay off the loan conveniently.
What Is a Home Equity Loan?
With this type of loan, you get a lump sum of cash up front and repay it over time, in regular installments, along with your original mortgage.
Unlike credit cards or personal loans, home equity loans are backed by your home – which may sound risky because you’re literally putting your home on the line, but it makes it less risky for lenders. Some will even charge lower interest rates for you.
Also, the risk of your home being used as collateral is real, so make sure you can pay the loan back.
Features of the Loan
A home equity loan might sometimes be confused with a home equity line of credit, so here is what sets it apart:
- Fixed Interest Rate. Your rate stays the same for the life of the loan, which makes budgeting way easier than a loan with variable rates.
- Lump Sum Payout. You get all the money at once, making it ideal for huge or one-time expenses like remodeling and debt consolidation.
- Set Repayment Schedule. Terms usually range from 5 to 30 years, with monthly payments that include both the principal amount and the interest.
Common Uses
You can use a home equity loan for:
- Home improvements and repairs
- Medical expenses
- Consolidating high-interest debt
- Education costs
- Emergency expenses
This loan is for people who want quick access to cash for paying off crucial debts or costs, and are confident in their ability to repay it.
Should You Get a Home Equity Loan?
The reason home equity loans are an attractive financing option extends beyond just accessibility. They also offer:
- Lower interest rates than other loans.
- Predictable monthly payments.
- Large lump sum for big expenses.
But you also need to keep in mind that:
- Your home will be used as collateral.
- The loan can increase your total debt.
- It might not help with ongoing expenses.
Weigh the pros and cons before deciding if you can really afford to borrow.
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