A home equity loan allows you to secure a line of credit against the total value of your home. You’re basically using your home as security, and if you own a home (even if it’s mortgaged rather than owned outright), these loans can help you secure a larger amount of loan money while meeting fewer stringent qualifications than other types of high value loans.
It’s essentially a type of “second mortgage.” To get one, you’ll need to have built up enough equity in your home.
Home equity is your interest in your home, as a homeowner. It’s a number that increases over time if the home’s market value goes up, or you’ve paid down the balance of your initial mortgage loan.
Your home equity is the “part” of your home that you truly “own,” from a bank’s perspective. If you bought a house with a 20% down payment, your home equity interest will be 20% of the home’s total value.
While you “own” 20% of the house, the bank doesn’t technically “own” the other 80%. Instead, it’s basically being used as collateral for your mortgage loan, and you own it de facto.
As we’ve mentioned, increases in your home’s value can raise your home equity. So if you bought a house for $200,000 with a $40,000 down payment, and the house is now worth $350,000, your stake will be 20% of that value, or $70,000.
There are some actions you can take, as a homeowner, to raise your home equity, giving you access to a larger loan amount if you take out a home equity loan in the future. Some things you can do include:
There are two main kinds of home equity loans that are available for homeowners. It’s easy to qualify as long as you own real estate, and the interest is often relatively low. However, while there are benefits, there are also possible risks, and home equity loans may not be the best choice in every situation.
There are several common uses for home equity among homeowners. This could involve taking out large lump sums to have cash on hand, or leaving it instead so you can pass on that wealth to your children. It generally depends on your own specific lifetime financial goals.
A home equity loan can help you:
We’ve mentioned that for homeowners, a home equity loan can be an easy way to get cash fast. So what’s the catch?
The biggest risk with a home equity loan, is that your home is used as the collateral. That means that if you are unable to pay it back, your home could be foreclosed upon — at which point the lender will sell it off themselves, to recoup the loss they took when you didn’t pay back your loan.
Foreclosure is something no one should have to go through. It’s a very real risk if you’re not careful with home equity loans. For that reason, it’s recommended that you only take out a home equity loan if you feel confident in your ability to pay it back.
In some cases, a home equity loan could be your best option if you need cash on hand, and have built a significant amount of equity in your current home. It’s not without its risks, so it’s important to understand how these loans work, and to make sure you’re using it for something that you won’t regret later. Read more articles on loans, credit scores, and financial advice on the TNL Car Title Loans blog.
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