If you own your own home, you've probably been inundated with offers from finance companies to lend you money based on the equity you've built up in it. A home equity loan is a loan that is backed by the value of your home. How much you can borrow depends on how much "equity" you have in your home. Equity is just the difference between how much your home is worth and how much you still owe on your mortgage.
In other words, if you bought a house for $125,000 and put $20,000 down, financing $105,000, your equity in the house on the day you close the deal is $20,000. Now, let's say a few years have passed. You've paid off $15,000 of your mortgage, but the value of your house has gone up to $175,000 at the same time. Your home's value is now worth $85,000: Your home is worth $175,000 right now, but you still owe $90,000. This means that your home is worth $85,000.
With a home equity loan, you can turn the value of your home into cash by borrowing money and putting up your home as collateral to make sure you'll pay it back. If you don't pay back the loan, the bank or housing agency can sell your home to get the money back.
People get home equity loans for many different reasons, but most of them fall into a few big groups. Often, the type of loan you apply for will depend on why you want a home equity loan.
"Consolidation of debt"
By far, one of the most popular reasons for homeowners to get a home equity loan is to pay off a lot of debt at once. If you owe money to more than one creditor at different interest rates, it's often in your best interest to combine all of those loans into one. To do this, you can get a home equity loan for the total amount you owe on all your debts, or more, and use that money to pay off all your debts in full. By doing this, you switch from writing several checks every month to writing one check, which is usually less than what you were paying on all of your debts together. This is because you are also trading in the higher interest rates on your credit cards and other loans for a lower interest rate on one loan. You probably also set a fixed time to pay back the loan, which is usually 15 years but could be as low as five or as high as thirty.
Home Improvements
If you want to fix up or fix up your home, it makes sense to get the money you need FROM your home. One of the top five reasons why people take out home equity loans is to make changes to their homes. If you want to make changes to your home to raise its value or get it ready to sell, you should definitely look into which changes give you the best return on your money. When a homeowner wants a home equity loan to pay for home improvements, they often apply for a home equity line of credit instead of a straight loan.
Weddings, trips, and college come to mind.
The third most common reason people get a home equity loan is to pay for big events like weddings or trips. A home equity line of credit is often a better choice than a lump sum home equity loan for a wedding or other special event where there will be multiple payments to different merchants.
