what are the benefits of a home equity loan

What Are the Benefits of a Home Equity Loan or Line of Credit?

• Low Interest Rates. The biggest benefit of both home equity lines of credit and home equity lump-sum loans is low interest rates.
• Flexibility. A home equity line of credit offers homeowners flexibility in how they spend their money. ...
• Stability. Some homeowners prefer lump-sum home equity loans because of their stability. ...

Full Answer

What are the advantages of a home equity loan?

Advantages of home equity loans. Payments are consistent, reliable, and easy to budget for. If you’re on a fixed income, this can be highly beneficial -- especially compared to variable-rate products like HELOCs and credit cards. They pay one-time lump sums.

What are the reasons to get a home equity loan?

What is a home equity loan used for?

1. Funding a home improvement project. Home improvements are one of the most common uses for home equity loans and home equity lines of credit.
2. Expanding the size of your home. If you’re looking to add an extra room to your home or craving more space, using your home equity can work in your ...
3. Consolidating your personal debt. ...
4. Starting your own business. ...

More items...

What can I do with a home equity loan?

Home equity is commonly used to pay off personal debt and help you manage monthly bills. Taking out these loans can help you consolidate high-interest debt at a lower interest rate. Paying off debt over a longer term could reduce your monthly expenses by a significant amount. 4. Starting your own business.

When should you consider getting a home equity loan?

• Shop around. Compare multiple offers before deciding on the best one for you. ...
• Budget for your monthly payments. Regardless of the type of investment you’ll be using your home equity for, ensure that you can continue making those scheduled payments, even if your ...
• Only choose wise investments. ...
• Do a cost analysis. ...

What is a disadvantage of taking out a home equity loan?

Con #1: Your home secures the loan, so your home is at risk. Foreclosure is possible if you can't make your payments. You'll want to carefully choose a loan amount, term, and interest rate that will let you comfortably repay the loan in good times and bad.

Is it good to borrow from your home equity?

Lower interest rates. Your home is what makes your home equity loan or line of credit secure. These loans have lower interest rates than unsecured debt, such as credit cards or personal loans. This can help you save on interest payments and improve monthly cash flow if you need to lower high-interest debt.

How many years do you have to pay off a home equity loan?

A home equity loan term can range anywhere from 5-30 years. HELOCs generally allow up to 10 years to withdraw funds, and up to 20 years to repay. A cash-out refinance term can be up to 30 years.

Why might homeowners take out a home equity loan?

A HELOC or home equity loan can be used to consolidate high-interest debt at a lower interest rate. Homeowners sometimes use home equity to pay off other personal debts, such as car loans or credit cards.

What is the monthly payment on a $100 000 home equity loan?

Loan payment example: on a $100,000 loan for 180 months at 5.79% interest rate, monthly payments would be $832.55.

How do I repay my equity loan?

You don't have to pay off the whole equity loan in one go. But the rules state you have to repay at least 10% of the property's current value. For example, you could repay 10% of the property's current value if you took out a 20% loan, or repay 10%, 20% or 30% of the property's current value if you borrowed 40%.

Can you pull equity out of your home without refinancing?

Instead, you can consider a home equity line of credit (HELOC) or a home equity loan. These 'second mortgages' let you cash-out your home's value without refinancing your existing loan.

What is the best way to get equity out of your home?

How to Pull Equity From Your HomeCash-Out Refinance. If you have a home worth $300,000, and you only owe $150,000, you can refinance your mortgage and pull out more cash. ... Second Mortgage/Home Equity Loan. ... Home Equity Line of Credit (HELOC) ... Reverse Mortgage. ... Buy a Rental Property With a Blanket Loan.

How do you borrow against your house?

A HELOC is a revolving line of credit that allows you to borrow against the equity you've built up in your home. During the draw period, you can borrow funds up to a certain limit set by the lender, carry a balance month to month and make minimum payments, much like a credit card.

Is using equity a good idea?

Using equity is a great way to build your property portfolio, increase your overall wealth and make the leap from property owner to property investor all in one go. Equity is a valuable and often underutilised asset.

Do you have to pay back home equity loan?

How long do you have to repay a home equity loan? You'll make fixed monthly payments until the loan is paid off. Most terms range from five to 20 years, but you can take as long as 30 years to pay back a home equity loan.

What credit score is needed for a home equity loan?

Key Takeaways. Home equity loans allow homeowners to borrow cash against their equity. Lenders generally want a credit score of at least 700. Interest rates are better for borrowers who have higher credit scores.

Why are home equity loans lower?

Even though home equity loans have closing costs, which personal loans do not, interest rates for home equity loans are usually lower because they are secured by your property. Typically, interest rates for home equity loans are also fixed. Because of the low interest rates on most home equity loans, borrowing against the equity in your home may be ...

What is home equity loan?

A home equity loan helps you cash out some of the portion of your home’s value that’s yours free and clear, so you can spend the money on renovations and improvements or other expenses. Let’s take a look at how home equity loans work, and how they can benefit homeowners.

How much equity do you have if you owe more than you owe on a mortgage?

So, if you owe $250,000 on your mortgage, but your home is worth $375,000, you have $125,000 in equity.

Can you deduct interest on a mortgage?

However, you can only deduct interest on mortgages up to $750,000, so if your home equity loan puts you above that limit, you may miss out on some of the tax benefits. A home equity loan or line of credit can also help you set up an emergency fund for your household.

Can you deduct interest on a home equity loan?

Interest paid on a home equity loan may be tax-deductible, provided you used the money to improve or renovate the home you borrowed against.

Can you borrow against equity in your home?

Home equity loans let you borrow against the equity in your home, but you may not be able to borrow the entire amount ; most banks will let you borrow about 80 percent of the equity value in your home. Basically, you’ll be taking a second mortgage on your home, and you’ll have to pay closing costs and monthly payments.

Is it cheaper to take out a home equity loan or a credit card?

If you need money, a home equity loan has its benefits. For one thing, it’s definitely cheaper than a credit card and it’s also usually cheaper than taking out a personal loan. Even though home equity loans have closing costs, which personal loans do not, interest rates for home equity loans are usually lower because they are secured by your property. Typically, interest rates for home equity loans are also fixed.

What is home equity loan?

What is a home equity loan? A home equity loanis a type of second mortgage that allows you to tap the available equity — the difference between your home’s value and your mortgage balance — in your home. The loan is paid out in a lump sum and is secured by your home.

What are the pros and cons of home equity?

Before filling out an application, take the time to review the pros and cons of a home equity loan. Pros. You’ll pay a fixed interest rate. One of the main benefits of a home equity loan is whether interest rates rise or fall, your monthly payments won’t be affected because your rate is fixed for the life ...

Why are home equity rates higher than home equity rates?

Rates on home equity loans are usually higher than they are for home equity lines of credit (HELOCs), because your rate is fixed for the life of your loan and won’t fluctuate with the market as HELOC rates do. Your home is used as collateral.

What is a HELOC loan?

A HELOC is a revolving credit line rather than a lump sum . It works similar to a credit card and has a credit limit that can be reused as it’s repaid. You only make payments based on what you owe, plus interest. Let’s take a quick look at the differences between a home equity loan and line of credit. Home Equity Loan.

What happens if you stop paying on your home equity loan?

If you stop making payments on your home equity loan, you could lose your home to foreclosure. You’ll pay closing costs. Home equity loans typically come with closing costsand fees, which range from 2% to 5% of the loan amount.

Why is home equity loan interest rate lower than credit card interest rate?

Interest rates on home equity loansare typically lower than rates for unsecured personal loans or credit cards, because your home is used as collateral. You can use the money for virtually any purpose. You have the freedom to use your loan to buy an investment property, start a business or fund another goal.

How long can you get a personal loan?

You may qualify for a loan amount up to $100,000 and a loan term of up to 10 years. Keep in mind that personal loan rates are often higher than home equity loans or HELOCs, since the loan isn’t secured by an asset like a home or car.

What is a home equity loan?

A home equity loan is a type of second mortgage that allows you to borrow against your home’s value, using your home as collateral. A home equity line of credit (HELOC) typically allows you to draw against an approved limit and comes with variable interest rates. Beware of red flags, like lenders who change the terms of the loan at ...

What are some alternatives to home equity loans?

Alternatives to home equity loans include cash-out refinancing, which replaces the mortgage, and a reverse mortgage, which depletes equity over time.

What is the percentage of your home's value?

Lenders try to make sure that you don’t borrow any more than 80% or so of your home’s value, taking into account your original purchase mortgage as well as the home equity loan for which you’re applying. The percentage of your home's available value is called the " loan-to-value (LTV) ratio ," and what's acceptable can vary from lender to lender. Some allow LTV ratios above 80%, but you will typically pay a higher interest rate. 1 5

How long do you have to pay interest on a HELOC loan?

You'll typically make fixed monthly payments on a lump-sum home equity loan until the loan is paid off. With a HELOC, you might be able to make small, interest-only payments for several years during your “draw period" before the larger, amortizing payments kick in. Draw periods might last 10 years or so.

How often do you get a check from your mortgage lender?

Although you have a few options for receiving the money, one common approach is to have your lender send you a check each month, representating a small portion of the equity in your home. That gradually depletes your equity, and you'll be charged interest on what you're borrowing during the term of the mortgage.

What happens if your home value drops?

Most plans allow them to do that if your home's value drops significantly or if they think your financial situation has changed, and you won't be able to make your payments. 3 Freezes can happen when you need the money most, and they can be unexpected, so the flexibility comes with some risk.

Is a home equity loan the same as a line of credit?

You've most likely heard the terms "home equity loan" and "home equity line of credit" tossed around and sometimes used interchangeably, but they're not the same. You can get a lump sum of cash upfront when you take out a home equity loan and repay it over time with fixed monthly payments.

What is home equity loan?

A home equity loan is a loan in which the lender uses your home as collateral to let you borrow money. If you can’t repay your loan, your mortgage lender can seize your property to get its money back. On the up side, they're easy to qualify for and usually have low interest rates.

What are the disadvantages of taking out a home equity loan?

Disadvantages of a home equity loan. Although there are plenty of good reasons to take out a home equity loan, there are some negatives as well. First of all, if you don't make your payments, you risk losing your home. That's serious business. Furthermore, you may run into problems if you have an outstanding home equity loan ...

What happens if you don't have a home equity loan?

Also, having a home equity loan in place could mean facing certain restrictions on your home.

What are some alternatives to home equity?

Alternatives to a home equity loan. A home equity loan isn't your only option when you need cash. Another option to consider is a HELOC, which gives you access to money that you can tap during a predetermined draw period.

Can you borrow more than the balance of your home loan?

But you borrow more than the sum of your outstanding home loan balance. That way, you get the difference in cash and use that money as you please. For example, if you owe $150,000 on your mortgage but do a cash-out refinance, you might take out a new loan worth $180,000. The first $150,000 of that will replace your existing mortgage balance, ...

Can you use equity in your home as collateral?

One major advantage of using the equity in your home to secure a loan is that it’s easy to qualify. If you have equity, a lender will generally approve your loan application, knowing it can use your home as collateral.

Can you sell your home with an outstanding equity loan?

Furthermore, you may run into problems if you have an outstanding home equity loan but need to sell your home. Although you are allowed to put your home up for sale with an outstanding loan attached to it, you'll need to sell it for a high enough price to pay off your balance.

What are the benefits of home equity?

Building off those “critical expenses”, home equity loans can be great use for the following reasons: 1 Using home equity to invest 2 Home improvement 3 Debt restructuring 4 Emergency fund

Why do people use home equity loans?

Building off those “critical expenses”, home equity loans can be great use for the following reasons: Using home equity to invest. Home improvement. Debt restructuring. Emergency fund.

Why are home equity loans so low?

This is due to the fact that the borrower’s home is collateral. From the bank’s perspective, it’s a solid guarantee that the borrower will reliably repay the loan.

What happens if you use a home equity loan recklessly?

Since this loan type depletes a home’s built-up equity, there will be nothing left if needed again in the near-future, especially if the borrower delays repayment. In these situations, the bank is well within its right to take ownership of the home, and sell it to cover the remaining debt. This process is called foreclosure, and the borrower can lose his or her home in the process. As such, be careful.

Can you take out equity on a home?

In order to take out a home equity loan, equity must actually be therein. Depending on the size mortgage taken out upon the purchase of the borrower’s home, it may take some time to build up enough new equity to make a home equity loan possible. To that end, it’s important to consider that by turning equity back into a loan, the borrower is returning to the debt he or she had just gotten out of.

Is home equity loan tax deductible?

Yes, home equity loans are tax deductible. Specifically, that is so up to the initial $100,000 of paid interest. Bear in mind that this deductibility is a benefit specific to home loans, and not for personal loans or credit cards.

Is home equity fixed or variable?

Unlike personal loans, which can vary between fixed and variable interest rates, home equity loans will always be fixed. As such, the borrower won’t receive any surprises, and should expect a reliable repayment schedule for the duration of the loan.

Key benefits of home equity loans

Those who get home equity loans may find there are several advantages versus other forms of borrowing.

Key drawbacks of home equity loans

While there are many benefits to using a home equity loan for significant expenses, you should also consider the downsides before taking out this type of loan:

Who home equity loans are best for

In general, home equity loans are best for borrowers who need to cover major costs or purchases and who know up front exactly how much money will be needed. These types of loans are also a particularly good option for those seeking to make improvements to their home.

Home equity loans vs. HELOCs

Both a home equity loan and a home equity line of credit (HELOC) use your home as collateral when borrowing money. However, there are also many differences between these two financial products, making it important to do your research and understand which one is truly right for your needs and financial picture.

Next steps

Home equity loans can be a useful option if you know how much you want to borrow and are more comfortable with a fixed monthly payment and fixed interest rate than a variable rate.

What is the risk to avoid when choosing a home equity line of credit?

One risk to avoid, whether you choose a home equity line of credit or a loan: Resist funding short-term needs with what may eventually amount to a long-term loan. About the author: Holden Lewis is NerdWallet's authority on mortgages and real estate. He has reported on mortgages since 2001, winning multiple awards.

How to find out how much equity you have in your home?

How to calculate your home equity. To find out how much equity you’ve built up in your home, subtract the amount of money you owe on your mortgage from your property’s value. Depending on your financial track record, lenders may let you borrow up to 85% of your home equity. Keep in mind, though, that you’re using your home for collateral, ...

How is a HELOC loan different from a credit card?

HELOCs and home equity loans are similar in that you’re borrowing against your home equity. But a loan typically gives you a sum of money all at once, while a HELOC is similar to a credit card: You have a certain amount of money available to borrow and pay back, but you can take what you need as you need it.

What is a HELOC loan?

Meantime, while you're living there, that gain is locked up, out of reach — unless you access the equity with a home equity loan or a home equity line of credit, known as a HELOC. These two types of second mortgages are drawn on your home's equity: the home's market value, minus the amount you owe. Weighing the pros and cons ...

Is a home equity loan a lump sum?

But remember: That home equity loan payment will be in addition to your usual mortgage payment. Since it’s a lump-sum equity draw, a home equity loan is a good source of money for major projects and one-time expenses.