Unlock Your Home’s Potential Value: A Guide to Home Equity Loans

As a homeowner, you may know that your mortgage payments aren’t just going into the ether. They can help you build equity.  

Home equity is your home’s current market value minus any liens, like your mortgage. It’s essentially how much of your home you own. Equity doesn’t just have to sit unused, however. It’s an asset you may be able to take advantage of, depending on how much equity you have and what your needs are. 

Learn more about home equity, home equity loans and how you might be able to use your equity in different ways.

What is a Home Equity Loan? 

A home equity loan may allow you to tap into some of your home equity in exchange for cash in one lump-sum. Since this is considered a second mortgage, it would be an additional loan that you would pay back as a separate payment from your mortgage. You would typically pay back the cash in fixed monthly payments over a pre-determined period of time, and the equity would be collateral for your lender. Because of this, if you’re unable to make payments on a home equity loan, your primary residence could be foreclosed on.  

The amount you could be eligible to borrow and your interest rate depends on several factors including your income, credit history and the market value of your home. To find out an accurate amount, you may want to consider speaking with your lender in depth about your finances and discover whether a home equity loan makes sense for you.

What Can You Use a Home Equity Loan For?  

In general, you may be able to use a home equity loan for whatever you want. Many borrowers use the funds for home improvement projects that can put value back into their home, including kitchen or bathroom remodels, lighting or hardwood floor improvements or upgraded appliances.  

But you can also use them to consolidate debt into a single payment, pay for large expenses or purchases like a wedding or car, fund higher education for you or someone important to you or even start your own small business.

Home Equity Loan vs. Home Equity Line of Credit (HELOC) 

You may have heard home equity loans and HELOCs used in the same context, but they’re actually different products. While similar in that both borrow against your home equity and that your home acts as collateral for the lender, HELOCs act more like a revolving line of credit much like a credit card.   

Your lender would establish a credit limit for a HELOC, and once this limit is established, you may be able to borrow against that limit in the same way a typical credit card works. HELOCs typically have a draw period in which you can access your credit at any time, and you may be able to make small interest-only payments during this time. After this period, you can’t access your credit anymore and must start repaying your debt with full monthly payments including principal and interest in addition to your original mortgage’s monthly payments.

Home Equity Loan Pros and Cons

Pros 

Consistency 

Home equity loans generally have monthly payments that remain consistent throughout the life of the loan. This helps you better predict your payments so you can adjust your budget for other monthly bills and necessities.  

Interest Rate 

Like the monthly payments, the interest rate typically stays the same throughout the life of the loan, and it may be relatively lower than interest rates for other types of debt, including credit cards or personal loans. 

Specific Goals 

Home equity loans may be a good solution to help you reach specific goals if you know how much you need to borrow since you generally get a specific amount in full at closing.

Cons 

Reloading 

Reloading refers to the cycle that borrowers go into when they use loans to pay off debt, free up credit, make more purchases and then borrow more money to pay off these purchases. Getting a home equity loan may seem like an easy solution for some borrowers, however it may put them further into debt. 

Foreclosure 

Since your primary residence is used as collateral for a home equity loan, it’s possible that it could be foreclosed on if you’re unable to make your payments.  

Negative Equity 

When you take out a home equity loan, you may be put at risk for negative equity. This is when the market value of your home decreases, and your loan balance is more than what your property is worth.

Can You Tap into Your Home Equity? 

Home equity loans aren’t for everyone. If you know there’s a big purchase in your future, like a home improvement project or a new, more reliable car, a home equity loan could potentially help. However, you may want to be wary about the risks, including using one of your most significant assets as collateral: your home. Before you make any big decisions, make sure you do the math and speak to a professional to understand whether or not you may be able to benefit from a home equity loan.