What is a Home Equity Loan or a Second Mortgage?

 

What is a Home Equity Loan?

It is a loan where you borrow money using your home equity as collateral. It is also known as a second mortgage.

How does a Home Equity Loan work?

A home equity loan is like a regular loan, where you get all the loan money upfront. You repay it through fixed monthly payments that cover both interest and principal. The loan is normally for 5 to 15 years.

Is the interest rate for a Home Equity Loan fixed or floating?

Home Equity Loans usually have a fixed interest rate.

What are the benefits of a Home Equity Loan?

Since home equity loans are secured or backed by your home, they are very easy to qualify for. You could also get access to a large amount of money, usually at a low interest rate. The current rates as of Aug 2019 are around 5%.

Are there any disadvantages of taking a Home Equity Loan?

One of their advantages is also their biggest disadvantage: since home equity loans are easy to qualify for, it is tempting to get this loan and use the money for short-term expenses like taking a vacation or buying a car. This cannot be good for building your wealth and net worth. The money obtained through a home equity loan should ideally be utilized toward long-term investments or for strategic uses – for example, consolidating higher-interest loans like credit card debt.

Also, your home is used as the collateral for a home equity loan. If you are unable to repay the loan for any reason, the bank can foreclose the loan and sell your house to recover its money.

Is a Home Equity Loan the only way to convert my home equity into cash?

No, you can also opt for a Home Equity Line of Credit, or HELOC. But that’s a topic for another time…

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