Home equity loans and home equity lines of credit are two different loan options for homeowners. A home equity loan (sometimes called a term loan) is a one-time lump sum that is paid off over a set amount of time, with a fixed interest rate and the same payments each month.
Since a home equity loan uses your equity as collateral, you’re basically using your house as collateral for a car. Using equity to pay for a depreciating value like an automobile is dangerous. The value of your car may depreciate faster than you’re able to pay down the home equity loan.
A home equity loan gives you added flexibility since it is a revolving line of credit. This is a good option if you have several smaller projects you are working on and you are unsure of how much each will cost.
You should only use a home equity loan for expenses that will pay you back, like a home renovation that increases value, paying for college, starting a business or consolidating high-interest debt.
A mortgage and a home equity loan are two separate loans, so a homeowner does not need to have a mortgage in order to get a home equity loan. In most cases, having a paid-off house can actually help your chances of getting approved for a home equity loan.
You can use a home equity loan for just about anything, but that doesn’t mean you should. Most people tap into their home equity to pay for house renovations or improvements, but you could use.
It’s no longer equity when you use it to secure a loan. Your loan amount is subtracted from the home equity you’ve built. Home equity loans may not be a good fit for those who don’t want to tie up their equity for a five- to 15-year term or want the option to take out money multiple times like you can with a home equity line of credit.
Home-equity loans can be valuable tools for responsible borrowers. If you have a steady, reliable source of income and know that you will be able to repay the loan, its low interest rate makes it.