If you own your home and have a decent amount of equity in it, either through a large down payment or the fact that you have lived in the property for a while, you can access that money through either a home equity loan or a home equity line of credit. Before you do, take the time to consider the benefits and risks of each one.
Both a home equity loan and a home equity line of credit are taken against your house. This means that your house is at risk if you should fail to repay the loan. It also means that you will not have that amount in equity if you should decide to sell your house before the loan or credit line is paid off. Always keep this in mind as you consider taking on a debt that puts your most valuable asset at risk.
A home equity loan is like a mini-mortgage. It is an amount of money based on the equity in the home, which is the difference between the likely sale price of the home and what you still owe on it. When you get a home equity loan, you get the money, and then you are required to make regular payments until the principal and interest have been repaid over a set period of time. Because the home stands as equity against the loan, these loans have lower interest rates than unsecured personal loans. Some people will use them when buying a larger item, such as a car, or when financing a major repair on their home.
A home equity line of credit is like a credit card but with your home as the security for the money borrowed. Instead of getting a set chunk of money at the outset as you would with a home equity loan, you are given the ability to borrow what you need, up to a set amount. Ongoing projects, like the need to pay for college tuition, are often financed in this manner.
Home equity lines of credit are ongoing debts. You will make a monthly payment, but there is no set term in which the debt must be repaid. This makes them dangerous, because the longer you take to repay the debt, the more interest you will pay. Also, many homeowners continue adding to their lines of credit, because they suddenly “have” money for expenditures they normally would not have made.
Both types of debt are dangerous in an economy where home prices are falling. It is very easy to get in over your head.
