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…
Podcast: What is a Home Equity Loan or a Second Mortgage
Fun, informative and concise episodes by a 10-year old, breaking down complex financial concepts in a way that kids and beginners can understand. Episodes cover personal finance topics like saving, investing, banking, credit cards, insurance, real estate, mortgage, retirement planning, 401k, stocks, bonds, income tax, and more, and are in the form of a conversation between a cowboy (a finance novice) and his friend, a stock broker. Making finance your friend, only at Easy Peasy Finance.
A little bit about me: I have been fascinated with the world of personal finance since I was 6! I love to read personal finance books, and keep myself updated on the latest by reading various personal finance magazines. My friends often ask me questions about finance because they find it complex and intimidating. That’s what inspired me to start my YouTube channel called Easy Peasy Finance when I was 8, and this podcast 2 years later.
Everything you need to know about home equity loans: What is Home Equity Loan or a Second Mortgage, How does a Home Equity Loan work, Is the interest rate for a Home Equity Loan fixed or adjustable / floating, What are the benefits of a Home Equity Loan, Are there any disadvantages of taking a Home Equity Loan, Is a Home Equity Loan or a Second Mortgage the only way to convert your home equity into cash, and more.
Show notes and transcript at: https://www.easypeasyfinance.com/what-is-a-home-equity-loan-or-a-second-mortgage/