3 Benefits of a Home Equity Loan

A home equity loan lets you borrow against the value of your home. You get a lump sum payout which you repay in monthly installments in a fixed amount until the loan is paid off.

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CoreLogic says the average American homeowner is sitting on $300,000 worth of equity in our homes.

A home equity loan is a popular way homeowners borrow large sums of cash at relatively low interest. Home equity loans are cheaper than many other forms of debt—but you could also lose your home if you don’t keep up with payments, so make sure it’s worth the risk.

ARE YOU QUALIFIED FOR A HOME EQUITY LOAN?

Most lenders require 15% or more equity for a home equity loan. You’ll also need the usual suspects: decent credit score, proof of income, a reasonable debt-to-income ratio. Since the loan is backed by an asset, credit score and DTI requirements tend to be a little more lenient than those for unsecured debt.

Benefits

LOWER INTEREST RATE

Home equity loans carry lower interest rates than many other means of borrowing money, like personal loans and credit cards.

FIXED INTEREST RATE

With set monthly payments for a fixed period of time, budgeting for repayment is pretty straightforward.

BORROW LARGE SUMS

A home equity loan is an easy way to quickly borrow more money than you could get from any other source.

But consider these drawbacks

ERODED HOME VALUE

With a lump sum payment you could end up taking out more than you need and spending the rest on frivolous things while eroding your home value in the process.

DEBT OVERLOAD

You could end up taking on more monthly debt than your future self can keep up with. Borrowing against your home’s equity could mean large payments that would be hard to cover if your income decreases.

FORECLOSURE

If you defaulted on repayment of your home equity loan, you could end up losing your house to foreclosure.