Home Equity Loan - Equity Line Of Credit

Also called a second mortgage and debt consolidation.

Like many, in the past I have fallen into a great deal of debt and decided to look into a home equity loan, or an equity line of credit. Securing it was actually rather easy, but the sad truth is that many people do not completely appreciate the advantages and disadvantages of a home equity loan.

What is a home equity loan?

A home equity loan is a loan for any equity you have in your house. Equity is the amount that your home is worth above the amount you owe for it. For example, if your home appraised for $100,000 and you only owe $50,000 on it, you have $50,000 in home equity. Depending on the lending institution and your credit, you may be able to secure a home equity loan or equity line of credit up to the entire $50,000 in the example above, but many banks prefer to stay at 80%, so you would be able to get at least $40,000,

Common uses for equity loans:

The most common uses for home equity loans and equity lines of credit are for debt consolidation. For this reason, they are often referred to as consolidation loans. As an example, if you have credit cards and other loans like automobile loans, etc. you secure a home equity loan to pay off all of these smaller loans.

Advantages of debt consolidation

The largest advantages are usually a savings in interest that you are paying and a lower monthly payment. Also, if you secure an equity line of credit, as you pay your loan, you can use the credit again, usually by writing a check that automatically adds the principle back onto your loan.

Disadvantages of a second mortgage

Depending on your viewpoint, you may or may not see this as a disadvantage, but you are using your home as collateral for debts that would not normally require you to risk your home. For this reason, you need to understand that if your income or job situation changes, you can lose your house if you can't make the payments on your home equity loan or equity line of credit.

Equity loan cautions

When you are looking for a home equity loan, you should research the available interest rates and make sure you understand all of the fees involved. The fees range from very little to very high, depending on the lending institution. I also recommend dealing with a local institution that you have familiarity with.

There are thousands of resources available online and in print about home equity loans and equity lines of credit. Your best bet is to do a great deal of research and planning so you make a well-informed decision.

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