A home equity loan is a kind of second mortgage. While the first mortgage is the one used to buy the house, additional loans can be placed against the property. With the home equity loan, you are allowed to borrow the same amount of money as the value of your house with the amount of any outstanding mortgages on the property excluded.
For instance, if your house has a value of $200,000 and your mortgage balance is $150,000. That means you can probably borrow $50,000 as the home equity loan. As your house can appreciate in value as time passes, your equity in the house can also increase.
If you have decided to take a home equity loan, you are required to have at least two things: equity in the house and a decent credit score. As you are taking the home equity loan, the property is used as the collateral so that your lender can secure the interest by getting a lien on the house. While you can take out a large sum of money from the bank, you will be asked to pay back the loan over a certain period of time (usually in the form of monthly payments) with the designated interest rate. Each monthly payment can reduce the loan balance and cover some of the interest costs.
Advantages of home equity loan
Compared with a personal loan, the interest of home equity loan is relatively lower as the loan is secured by your house. Besides, you may ask for a tax deduction for the interest if you use the loan to purchase, build, or improve the house.
Disadvantages of home equity loan
Once you fail to repay the loan, you are highly likely to lose your property to foreclosure. In addition, if you sell your house, you will be asked to pay the debt off at once within its entirety. Closing costs are also required to be paid if you take out the loan.