A home equity loan is a loan that uses your home as collateral. Your home equity is the part of your home that you actually own and this is the guarantee for your loan. This is calculated by taking the current value of your home and subtracting your mortgage. For example, if your home is worth $100,000 and you have a $80,000 mortgage, you have $20,000 of equity in your home.
A home equity loan allows you to borrow money using your equity of $20,000 as security for the loan. A home equity loan, also called a second mortgage, reduces your equity in your home. Since you use your home as collateral if you default on the payments you can lose your home. This is the biggest drawback of the loan. In addition to paying interest, there are also costs that are associated with taking out a home equity loan, which are similar to the expenses that you paid on your first mortgage.
There are some advantages of a home equity loan. One major advantage to getting a home equity loan is you will receive a low interest rate. Since a home equity loan is secured by your home, it poses less risk to a lender so this lower risk is passed on to you in the form of a lower interest rate. Another advantage is that the interest that you pay on your home equity loan may be tax deductible. This is a big benefit of getting a home equity loan versus using a credit card.
Something that you should watch out for while looking or applying for a home equity loan is to make sure you get a fixed interest rate, if you are going to have the loan for an extended amount of time. Especially with the interest rates like they are now. Interest rates are really low right now but if you have a variable interest rate, when the interest rate goes up (it eventually will) you may be stuck with a home equity loan that has a higher interest rate than you wanted.
