A home equity loan can go by many names, such as an equity loan, equity mortgage, or a second mortgage. These loans allow you to borrow money against the equity you have built in your home. The amount you can borrow will depend, at least in part, on how much equity you have.
Equity refers to the difference between the fair market value of your home and what you owe on your mortgage. If your home is valued at $300,000 and you owe $225,000 on your home loan, you have $75,000 in equity. Most people can borrow up to 85 percent of their home equity in a loan.
When you take out an equity loan, you have access to the full amount of the loan. This is the primary difference between an equity loan and a home equity line of credit, or HELOC, which works much like a credit card with a line of credit.
In most cases, you must pay off your home equity loan within 15 years. Most equity loans have fixed interest rates, whereas HELOCs usually have adjustable rates. You can use your second mortgage to pay for medical bills, education, home improvements, remodeling, and anything else you like. Interest you pay on a second mortgage is tax deductible, as well.
While equity loans can be very beneficial, they must be used carefully, especially when it comes to buying consumer goods. This is because the loan is secured by your home. If you default on your loan, you can end up in foreclosure.
There are many advantages to choosing an equity loan:
If you need a significant sum of money to buy a car, pay off bills or fund college, and you can afford the payments, a second mortgage is worth your consideration. Interest rates are usually very low, which makes these loans popular among borrowers who want to consolidate debt.
If you do not need a large sum of money at once, or you want to access your money in case of emergency, a HELOC may be a better option.