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Home Equity Loans Explained

What you need to know about home equity loans

Home equity loans are loans that are secured by the equity that you have built up in your home. (Equity is the difference between your home's market value and the amount you owe on it.) 

A home equity loan will allow you to use some of your home's equity to:

  • Relieve an overwhelming debt burden. If you have trouble making the minimum payments on your bills every month, you can take out a home equity loan and consolidate your debts.
  • Buy a new car with a low interest, tax deductible loan. Why pay outrageous interest charges on a standard auto loan when you can pay for your car with a loan that has a lower interest rate and is tax deductible?
  • Make improvements to your home that will increase its value. Do you need to add on another bedroom or finish the basement? A home equity loan will enable you to add value to your home while making it more functional.
  • Finance your child's education (or your own!). Do you have a child who is ready to start college? Do you want to further your own education in order to qualify for a higher paying job or switch careers? A home equity loan can help you pay for it.
  • Start a business. Maybe you have a life-long dream of being your own boss. Do some research, decide what you want to do, and finance your new business with a tax deductible home equity loan!
  • Take advantage of a once-in-a-lifetime investment opportunity. Maybe you heard about a very profitable rental property that has just come on the market at a huge bargain, but you don't have money for the down payment. The solution? You guessed it: a home equity loan!
  • About a million other things (limited only by your imagination).
There are several advantages to taking out a home equity loan instead of a regular consumer loan, including:
  • Home equity loans are available at lower interest rates than consumer loans.
  • Home equity loans are easier to qualify for since the loan is backed by the equity in your home.
  • Under most circumstances, home equity loans are tax deductible.
Here are the disadvantages of home equity loans:
  • Home equity loans "use up" the equity that you have built up in your home which means it will take longer to pay off your home.
  • You can potentially end up losing your home in the event that you default on the home equity loan.
If you decide that a home equity loan is for you, shop around for the best interest rate and lowest closing costs. These factors often make the difference between a good home equity loan and a great home equity loan.

Additional Resources:

   Home Equity Loans

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