Happy Home Insider

Understanding The Home Equity Loan

Now that you’ve done your budgeting, gotten an affordable mortgage at an ideal rate, and everything seems to be going along smoothly; it might seem as though you’ll be cruising into your golden years without a hitch. 

Home ownership is a hallmark of the American dream. Becoming a homeowner is associated with success, stability, and is considered by many to be a right of passage into full-blown adulthood. Now that you’ve done your budgeting, gotten an affordable mortgage at an ideal rate, and everything seems to be going along smoothly; it might seem as though you’ll be cruising into your golden years without a hitch.  However, life happens. Sometimes we’re hit with unexpected expenses that can throw a wrench into our fiscal game plan. In these situations, there is another benefit to being a homeowner that can help you withstand any major financial windfalls you may encounter; I am referring, of course, to the Home Equity Loan.

How Home Equity Loans Work

Home equity loans allow you to take out large money loans against the value of your home. Home Equity Loans are typically more attainable than other types of loans because your house backs them. These loans often times come at a lower interest rate than other types of unsecured loans like a credit card or personal loan. Home Equity Loans are usually easier to qualify for in the event that the applicant has bad credit, as lenders have your home securing the loan as a means by which to mitigate their risk.  In lay mans terms, if you don’t pay back your home equity loan, the bank can and will take your house.

So you’ve applied, been approved, and secured your home equity loan. Now you can use the funds you’ve received to repair the roof, put junior through college, or take care of whatever other curveball life sent your way that caused you to apply for the loan in the first place. However, now that you’ve gotten the loan, you have to start repaying the loan. Home equity loans have fixed interest rates; meaning that you’ll make the same monthly payment for a predetermined term.

Home equity loans can be an excellent financial instrument when used correctly. In addition to fulfilling whatever immediate needs you may have, home equity loans can also help you rebuild your financial profile. The mounds of credit card debt at high interest rates that you’ve been making the minimum payments on and not even beginning to put a dent in your principle? With a home equity loan, one could feasibly pay off their outstanding high-interest credit card debit with a low interest home equity loan and save themselves a boatload of cash long term. However, it’s important that you curb the reckless spending that landed you in hot water with the credit card companies in the first place, or you may only be digging yourself into a deeper ditch.

When considering home equity loans be sure that you’re thorough. We like to all believe the man in the suit with the good hair cut and award-winning smile has our best interest at heart, but the truth is, there are a lot of lenders out there guilty of preying on the ill informed.  It’s important to be aware of predatory practices such as bundling unnecessary insurance products along with your loan, encouraging you to repeatedly refinance (known as “loan flipping”), or even changing the initially agreed upon terms and pressuring your to sign anyway. If you encounter any of these situations while dealing with a lender, make sure you keep your head on a swivel so you don’t become a sucker.

Final Thoughts on Home Equity Loans

The bottom line with home equity loans is that they can be a very useful tool in order to pay for large expenses or to appropriate debt in a more fiscally sound manner, but there are definitely major caveats that you should be wary not to fall in to. Your best bet when considering these loans, is getting a clear, well-rounded understanding of your finances, and evaluating them with a trusted professional before moving forward.

Christine Shaw

Christine Shaw is a work from home mom who has been in the real estate industry for 8 years. Her passions are her kids, chocolate, and writing and sharing her personal experiences. As a single Mom she has had to navigate the in and outs of home ownership herself and enjoys helping other overcome those hurdles.

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