Considering a Home Equity Loan? Here’s What You Need to Know

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These days, consumers have a lot of options when it comes to borrowing money. In fact, it seems like banks are constantly peddling products like credit cards, personal loans, and lines of credit. It seems like someone is always willing to lend us money.

If you own a home, you’ve probably also received information about taking out a home equity loan from your mortgage lender, along with a flashy brochure or email detailing all the advantages of this type of loan. If you’re not exactly sure what a home equity loan is, it’s simply a loan that the bank provides to you using the equity in your home as collateral. So, for example, if your home is worth $300,000 and you still owe $200,000 on your mortgage, you could take out a home equity loan for up to $100,000, since this is the equity available in your home.

There are some definite advantages to choosing a home equity for your credit needs. For one, home equity loans are usually available at a lower interest rate than other forms of credit. Whereas a credit card might charge you 20% or more in interest, a home equity loan will probably only run you 5%-7% in interest charges, depending on your credit score. The other attractive feature of home equity loans is that, in most cases, the interest you pay on the loan is tax deductible. Again, few other types of loans offer this advantage.

However, taking out a home equity loan does come with certain risks. For example, there’s always a chance that the real estate market could take a nosedive and your house’s value could drop. If this happens and you’ve borrowed against what your home used to be worth, you could end up owing more on your home than it’s worth. Another significant hazard attached to home equity loans is the prospect of your home being foreclosed on if you don’t pay on the loan.

In general, the only circumstance under which you should consider a home equity loan is if you really need some extra cash and you’ve exhausted all other cost-effective options for borrowing money. Take the time to explore all of the loan options out there before resorting to a home equity loan. Remember, your home is your most valuable asset, so it’s not sensible to put it at risk if you don’t have to.

About Lindsay Meredith

Lindsay is a high school teacher and personal finance blogger. She lives, works, and plays in the Washington, D.C. area.

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