Home equity loans allow homeowners to borrow against the equity in their homes. The loan amount is determined based on the difference between the current market value of their home and the outstanding mortgage balance. Home equity loans tend to be fixed-rate, while the typical alternative, home equity lines of credit (HELOCs), generally have variable rates. A home equity loan can be a good way to convert the equity you’ve built up in your home into cash, especially if you invest that cash in home renovations that increase the value of your home. However, always remember that you’re putting your home on the line—if real estate values decrease, you could end up owing more than your home is worth.
 

HOME EQUITY LOANS vs. HELOCs
 

Home equity loans provide a single lump-sum payment to the borrower, which is repaid over a set period (generally five to 15 years) at an agreed-upon interest rate. The payment and interest rate remain the same over the lifetime of the loan. The loan must be repaid in full if the home on which it is based is sold.

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A HELOC is a revolving line of credit, much like a credit card, that you can pull as needed, pay back, and then pull out again, for a term determined by the lender. The pull period (five to 10 years) is followed by a repayment period when pulls are no longer allowed (10 to 20 years). HELOCs typically have a variable interest rate, but some lenders offer HELOC fixed-rate options.

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ADVANTAGES OF A HOME EQUITY LOAN
 

Home equity loans provide an easy source of cash and can be very helpful financially for responsible borrowers. If you have a steady, reliable source of income and know that you will be able to repay the loan, low interest rates and possible tax deductions make home equity loans a sensible choice.

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Obtaining a home equity loan is quite simple for many consumers because it is a secured debt. The lender runs a credit check and orders an appraisal of your home to determine your creditworthiness and the combined loan-to-value ratio. The interest rate on a home equity loan tends to be higher than the rate you would receive on a first mortgage, however it is much lower than rates on credit cards and other consumer loans. That helps explain why the primary reason consumers borrow against the value of their homes via a fixed-rate home equity loan is to pay off credit card balances.

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