What is A Home Equity Loan?

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Home Equity Loan Explanation: A home equity loan is an additional (secondary) loan taken against the value of your home. In other words, home equity loans are secured consumer loans for which the collateral would be the borrowers’ equity in their homes.

Now, what is home equity? Home equity is nothing but the difference between a property’s cost and its value.

The money raised via home equity loans can be used for any purpose related or unrelated to your home or property. You could use this money for your children’s education, for further furnishing or extension of your home or even to pay off your high interest debts or credit card dues. The home equity loan interest rates are usually lower than car loan rates and hence it may make sense to use your home as collateral to buy a vehicle.

The interest on home equity loans is tax deductible.

In order to apply for a home equity loan, one should have a decent credit history. There may be finance institutions that provide home equity loans for people with bad credit. However, you may take extra care while signing up with such deals and especially be aware of hidden charges etc.

Home equity loans have their pros and cons as in the case of any other loan types. The advantages include low interest rates, fast approval and possibility to use the loan amount for any purpose as mentioned above. The main disadvantage of home equity loan is that your home needs to be appraised for its home equity that can be secured against your loan. Also, home equity loans are available only if the owner is occupying the home under consideration.

Just like the case of selling a car with a lien, selling a home with a home equity loan on it usually requires you to pay a penalty remove the loan.

Taking an additional loan by using your existing home as the collateral is an exercise that has to be done after analyzing the above pros and cons. If used judiciously it can really work to manage your finance needs.