A home equity loan, also known as a second mortgage, allows homeowners to borrow money against the equity in their home. The amount of the loan is partially based on how much equity there is in the home. Equity is the difference between the value of the home and how much is owed on the mortgage. More equity in the home translates to more money available to borrow. And the longer you pay down the mortgage and the more your home appreciates in value, the more equity you build up in the home and the larger a home equity loan you may qualify for.
If you need a lump sum of money for something important and are sure you can easily repay a home equity loan, it’s worth considering. And sometimes the interest paid on home equity loans is tax deductible, so this may be an added financial bonus (talk to your tax adviser). Home equity loans are used for a variety of financial needs. Many homeowners use home equity loans to do repairs or upgrades on their homes, pay for their kids’ college or pay off high-interest debt like credit cards or other debt. Interest rates on home equity loans are often much lower than rates on credit cards, so a home equity loan can actually save thousands of dollars.
With a home equity loan, the borrower receives the entire amount of the loan all at once (as opposed to a home equity line of credit, which works more like a credit card, where you take just what you need when you need it). The interest rate on a home equity loan with fixed terms ranging from 5 to 30 years or adjustable terms, which is commonly referred to as a home-equity line of credit or HELOC.