A home equity loan is a type of financing that uses your equity as collateral. The lender decides how much you can borrow based on the amount of equity you have in your home. Most lenders won’t lend you the full amount of your equity, as this increases their risk.
If you’re approved, the lender will create a second mortgage and cut you a check for the full loan amount. You can then use this lump sum how you wish and will repay it in equal installments with interest over time. This can be a good option if you know exactly how much you need to borrow.
Pros of Home Equity Loans
- Tap into your home’s equity. A home equity loan allows you to access built-up equity in your property and turn it into cash.
- Use for almost any expense. You can use the funds from a home equity loan to cover almost anything you’d like, such as education expenses, renovations, medical bills and more.
- Fixed rates. Home equity loans usually come with fixed rates, which means your payments will stay the same throughout the life of the loan.
Cons of Home Equity Loans
- Acts as a second mortgage. If you take out a home equity loan and haven’t paid off your first mortgage yet, you’ll have to make payments on both loans at the same time.
- Can’t reborrow against the loan. If you end up needing more money than you expected, you’ll have to get another loan.
- Risk of foreclosure. If you can’t keep up with your home equity loan payments, you risk losing your house.