Home Equity Loan

Definition - What does Home Equity Loan mean?

Home equity loans, which are collateralized by the borrower’s home, allow homeowners to borrow money against the value of their home. Borrowed funds can then be used for related home expenses, such as renovation or remodeling; or for funding other expenses, such as a vacation, repaying other debts or paying college tuition.

Home equity loans are especially popular when the value of homes rises, allowing homeowners to tap the equity in their homes. Historically, home equity loans have been used by consumers who generated high consumer debts, such as credit card debts, and then consolidated those debts, repaying them with lower interest home equity loans.

Justipedia explains Home Equity Loan

Home equity loans offer many benefits. For example, they can be the perfect financial vehicle for homeowners who need access to money fast and want to skip the onerous application process of a traditional mortgage. Home equity loans also help homeowners who have a substantial amount of money locked up in their home but need liquid money to pay for current expenses.

Additionally, home equity loans offer flexibility in payment. For example, a home equity loan can be paid as a single advance of funds, which are repaid monthly, or as flexible lines of credit with variable rates.

Finally, because the interest rate for borrowing money remains low, borrowing money against a home can be inexpensive. There is also an extra benefit: the interest that you pay for your home equity loan may also be tax-deductible.

Although home equity loans may provide much-needed cash flow, it’s also important to consider the downsides of taking equity out of your home:

  • First, as with any loan, if you cannot make the necessary loan payments, the lender may have the right to foreclose on your property.
  • Next, if you find that you are consistently needing extra cash for living expenses, it may be time to increase your income and rein in your spending rather than continually living above your means and putting your home at risk.
  • Finally, the tax break afforded by a home equity loan may not always be as valuable as homeowners assume.

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