If you’re looking for some extra cash for one reason or another, you’re probably discovering that there are a variety of loan types out there, including one called a home equity loan.
So what exactly is a home equity loan and what does it entail for a borrower like you? Here are three key things to know:
- What is a home equity loan? A home equity loan is essentially a loan that uses your home as collateral and equates to the difference between your home’s market value and your remaining balance on your home mortgage. Because of this, you need to be a homeowner to take advantage of a home equity loan, many of which can often offer low rates and potential tax breaks.
- How does borrowing work? There are two ways to borrow against your home equity. The first would entail you, the borrower, being given a single sum of money with repayment over a fixed period at a fixed interest rate. The second allows you to borrow money as you need it up to the amount your lender approves you for, with variable interest rates on your repayments.
- When should I consider a home equity loan – and when not? There are certainly situations in which a home equity loan is a good option and others in which it’s not. As in any circumstance where you’re increasing your debt, remember that you should be utilizing debt to ultimately better your financial state. For that reason, home equity loans are best suited for financial situations like financing home improvement or college expenses.