A home equity loan is a loan where the borrower uses the equity of their home as collateral to borrow money. Your home’s equity is its market value minus the mortgage(s) or other liens against it.
When your mortgage is relatively new, most of your monthly mortgage payments go toward paying down interest. However, later on, once more of your mortgage payments pay down the principal, your equity begins to grow quickly. The ability to use this equity is one of the benefits of owning a home.
Why use a home equity loan
As a financial tool, a home equity loan can help you achieve numerous goals. The interest rates are generally lower than those of a personal loan or a credit card, and there is also the benefit of it usually being tax deductible – you should check with your financial advisor before making any tax-related decisions.
Home equity loans are often used for repairs and renovations of the home. Improving your home increases your home’s value. Other reasons why a home owner might choose a home equity loan include:
- Adding a room
- Adding or renovating the pool
- Having emergency cash for unforeseen expenses
- Paying for your child’s education
- Paying off your debts
- Purchasing a new car
- Taking a dream vacation
If you are a home owner that is looking to use your home as a financial resource, then a home equity loan might be the right choice for you.