There has been a lot of talk in recent years about using home equity to finance loans and lines of credit. This shouldn’t come as a surprise, since home equity has both a high value (provided the homeowner has been making payments on their home for long enough) and is easy for lenders to work with since the lien created by a home equity loan is based upon a piece of real estate. These two factors are what enable a number of lenders to offer better interest rates on home equity loans than they might be able to on other types of loans to the same individuals.
Home equity loans aren’t always the best option, however. You should carefully consider the ramifications before taking out a home equity loan… after all, it’s your house that you’re putting on the line if you aren’t able to repay the loan. This doesn’t mean that you shouldn’t apply for a home equity loan, however; instead, simply take a little time to learn more about home equity lending and use this information to help you to decide whether a home equity loan is right for you.
What Equity Is
Many people aren’t even completely sure what equity is, much less how it’s used as collateral for a loan or a line of credit. Basically, equity is the amount of money that you’ve invested into your house by making your mortgage payments. It’s the percentage of the house that you “own”, and is a representation of how much money has been paid against the total amount owed.
How Home Equity Loans Work
When you apply for a home equity loan, you take out an additional lien against your house or other real estate. This means that you have another claim against your property by a lender, and that if you are unable to repay your debts then the value of your house or real estate will be used to pay off the original mortgage and then the remainder will go toward your secondary lien. Obviously, borrowing against the equity in your house or another piece of real estate reduces the amount of equity in the property… meaning that you have to begin building up your equity all over again.
Home Equity Lines of Credit
Slightly different from a home equity loan is the home equity line of credit. These credit lines work just like credit cards issued by any bank, but they use the equity in your home or real estate as security to guarantee that you’ll repay whatever you charge to the credit line. These lines of credit are a popular alternative to some home equity loans, especially those that would be used from some home improvement projects or multiple purchases or payments.
Home Equity Loan Recommendations
When trying to decide whether or not to use your home equity to secure a loan or line of credit, you should stop and ask yourself if there are other options available. Do you really need the loan or line of credit? Is there any other potential collateral that could be used as security instead of your equity? Will the payments for the new loan be manageable with any other debts that you might have?
By taking the time to consider your alternatives you might find that it’s much easier to make the decision of whether you should use your equity as collateral. The most important thing is to make sure that you can afford to repay what you borrow, since you’re putting a lot up for your collateral.