From major home renovations, to having to buy a car, the need to pay for a child’s college education or countless other things, there are many reasons why homeowners find themselves in need of money. But when it comes to financing life’s expenses, running up credit cards or taking out a loan may not be your best bet. If you have equity in your home, odds are good that your cheapest form of financing is through a home equity loan, which is basically a second mortgage on your house.
Just as its name suggests, a home
equity loan is a loan taken out against the value of your home, where a lender
uses your property’s value as an underlying way of securing the loan’s
repayment. The amount you can borrow against your home’s value is determined by
the underlying value of your home and the percentage of your mortgage that has
already been paid off. Since such loans are lower risk for lenders because of
their ability to foreclose on your home should you default, home equity loans
are typically easier to qualify for and have lower interest rates than other
types of loans or other financing options such as credit cards. All of these
factors have long made home equity loans a popular form of financing.
With interest rates for most credit
cards being much higher than the average 15-year home equity loan, home equity
loans can be an attractive way of paying down debts –possibly even paying off
higher credit card bills. But don’t forget that, while home equity loans are
often easier to get, they are not without risk. And if you do choose to take
out a home equity loan, make sure not to take out more than you truly need
–despite the ease of pulling money from your home.
to repay a home equity loan won’t just affect your credit score, it could
ultimately mean losing your home. As with all loans, home equity loans still
involve closing costs, so don’t forget to factor that into what you’ll
ultimately be borrowing/repaying the bank.
Also, keep in mind
that taking out a home equity loan, especially a home equity line of credit
(HELOC), will have an impact on your overall credit score, much in the same way
as maxing out your credit cards.