What is a home equity loan?
A home equity loan is a loan in which the borrower uses the equity in their home as collateral. Your home’s equity is equal to its market value minus any mortgages or other liens owed on it.
In the early stages of your first mortgage loan, the majority of your monthly mortgage payments goes toward paying down the interest, but once you begin to make principal payments, the amount of equity in your home increases. Then, as your home appreciates over time, its equity grows even faster. The opportunity to use this equity is one of the benefits of homeownership.
Why do people use home equity loans?
As a financial tool, home equity loans can help you achieve many of your goals. The attractive rates can be lower than those of a personal loanor unsecured credit card – not to mention the added benefit of being tax deductible in most cases (always check with your tax or financial advisor before making any tax-related decisions).
A popular use of a home equity loan is for home renovations or repairs. By improving your home you are putting money back into your house, which can increase its value. Other reasons homeowners use home equity loans include:
- Adding a room as their family grows
- Purchasing a new car
- Adding or renovating a pool
- Taking that dream vacation
- Paying for their child’s education
- Paying off outstanding debts
- As emergency cash should unforeseen expenses arise
If you are a homeowner looking to use your home as a financial resource, then a home equity loan or home equity line of credit may be right for you. Always shop online to find the best home equity product that meets your specific needs.
© Copyright 2010, Informa Research Services, Inc. (“Informa”). While all attempts have been made to provide effective, verifiable information in this article, neither the author nor Informa assumes any responsibility for errors, inaccuracies, or omissions. You should always seek the guidance of a licensed professional before making any major financial decisions.