A home equity loan is a loan given to a homeowner which is secured on the equity which has built up. If a homeowner has spent many years paying back their mortgage loan, they will have an amount of equity which has built up in the house. A home equity loan will allow them to borrow on the amount of equity which has built up and will in effect reduce the amount of equity in the house.
To be eligible for a home equity loan you will usually need to have a very good credit history and the amount you can borrow will depend on the amount of equity you have built up in your home. You can choose from a closed end or an open end home equity loan and are both known as second mortgages. It is common for a home equity loan to be secured against the property but they are usually for a shorter length of time than the main mortgage.
You may have heard of Home Equity Line of Credits (HELOC) when researching home equity loans. These are different to home equity loans in that a HELOC is more like a credit card as it is a constant revolving credit with varying interest rates, while a home equity loan is a one time lump sum which is borrowed against the equity in the home usually at a fixed interest rate.
A home equity loan is considered to be a safe option for lenders as you are using your home as collateral. People are more likely to meet the repayments if their home is at risk. A home equity loan is also a good choice for the borrower as they can borrow a lump sum at a much lower interest rate than a personal loan for example. They are also more likely to be able to borrow a larger amount. Home equity loans are commonly used for redecorating a home, financing the purchase of another home, consolidating other debts, paying for a wedding or for funding a college education.
There are some drawbacks to getting a home equity loan and the major one being that you are putting your home at risk if you cannot meet the extra repayments. You should also make sure that you only do business with a reputable lender as there have been instances of people taking out home equity loans with companies that have not been so reliable.
To make sure that you are getting the best home equity loan it is important to look around and to compare offers from various lenders. Before applying, get a copy of your credit report so that you can see whether you will be likely to get a positive decision. There is no point in applying for credit if you are unlikely to be approved. This could further damage your credit report.
Before you use your home as further security on another loan, you should be sure that this is the best type of loan for you. You should make sure that you can afford to meet the repayments and that you will be not over stretching your finances by taking out a home equity loan.
There are great advantages to taking out a home equity loan. It can provide you with a large amount of cash at a low interest rate but it can be disastrous if you find that you cannot meet the repayments. It is important that you do not take out any loans which could put your home at risk unless you are certain you can may the payments.