Financial Education

What is a home equity loan? Find out the pros and cons

Purchasing a house or apartment of your own can be a big challenge. In this sense, learn how a home equity loan can help you!

Advertisement

by Sabrina Paes

Published on 10/24/2022

Home equity loan: Realize the dream of owning a home without suffering

home equity loan
Find out about home equity loans! Source: Adobe Stock

Owning your own home can be a dream for many people, including yours. However, many people do not know there are easy ways to fulfill this dream, such as a specific loan. But what is a home equity loan?

personal loan written in wood

Different types of loans available

Are you in need of money? A loan can be the immediate solution you need. Learn about the main types of loan you can take out.

A home equity loan is a specific type of loan to purchase a home. Interest rates and payments are flexible and determined according to each person’s credit score. Learn more about this option.

Advertisement

What is the purpose of a home equity loan?

Conquering a home of your own can bring a headache regarding finances. However, you can rest easy with a home equity loan. But what is a home equity loan, and how does it work?

An equity Loan is a type of consumer debt made to get money. In this sense, the money should be used to pay for house renovations or purchase the property itself.

However, this financial aid is granted with the security of payment for the house or apartment. So, if you don’t make the payment correctly, you risk losing your real estate assets.

Either way, the loan amount is based on the difference between the home’s current market value and the mortgage balance.

Therefore, this type of loan includes a fixed monthly interest rate, unlike other types of loans.

Are home equity loans the same as a mortgage?

home equity loan
Can home equity loans be mortgages? Find out! Source: Adobe Stock

A home equity loan can also be considered a type of mortgage with some modifications. In this sense, the property is involved in both cases and given as payment security.

However, the real estate loan is carried out after you own a house or apartment. That way, you can apply for the loan and secure your own house.

But, in the case of the mortgage, the loan serves as an aid for you to buy the house. That is, it allows the buyer to own their home with financial aid.

However, in both cases, the house can be given as security for the correct payment of the loans. Therefore, they are very similar types of loans with similar interest rates.

stacks of coins with illustrations on top

What is a personal loan: an uncomplicated guide

At times, we may experience financial difficulties. In such cases, can a personal loan be ideal? But what exactly is a personal loan? Read on to find out!

Advertisement

Home equity loan pros and cons

The value of a home is high and can bring financial difficulties in the acquisition. So home equity loans can help.

But what is a home equity loan, and what are its benefits? It is a great option for you who want to pay off your own home or do a renovation.

Therefore, it has fixed rates and reduced interest in the case of reform. However, they can also put your home at risk because it is given as collateral. Check out the pros and cons.

Advantages

  • Home equity loans bring greater clarity to payment. After all, the rates are fixed and not variable, as in other types of loans;
  • It is possible to earn a much lower interest rate than you would with a credit card or personal loan;
  • You can stay with the low mortgage rate if that’s the case for you;
  • If the justification for requesting the loan is housing improvement or renovation, interest can be renegotiated and reduced.

Disadvantages

  • Flexibility is reduced compared to other options, such as a line of credit to invest in housing;
  • Regardless of adopting an incremental format for using the loan, you will need to pay interest on the full amount. This is also true for a small or complex renovation project;
  • There is a possibility of losing the asset. In this case, as the house is given as security for cases of default, the house can be lost;
  • The sale of the house before paying off the loan completely may have problems with the balance, which will appear as due.

Does having a home equity loan hurt your credit score?

A home equity loan can reduce or negatively affect your credit score in several ways.

Firstly, when you apply for a loan, it is recorded in your history that you need money. Thus, the loan affects your score by up to 10%.

In addition, the credit consultation carried out by the lender to be able to release the loan affects the score.

In this sense, your score may have a new decay with each query. Therefore, it is important to think very carefully before hiring.

How much can you borrow with a home equity loan?

home equity loan
Learn about how much you can borrow for home equity! Source: Adobe Stock

The amount to be granted by this type of loan varies according to the value of the home to be insured. That is, the higher the value of your home, the greater the chances of earning more money and low-interest rates.

However, for the request to be made, it is essential that certain requirements are met. In this regard, it is important to have home equity of at least 15% to 20%.

In addition, the applicant must have a credit score of 620 or higher. Finally, a record debt-to-income ratio of 43% or less is important. That way, the chances of getting a good home equity loan are higher.

In any case, the value will be calculated based on an analysis of all characteristics. However, the value will be based on up to 80 to 90% of the home’s appraised value.

Additionally, associated interest rates are calculated based on credit history and score.

What can you use your home equity loan for?

Now that you know what a home equity loan is, understand what it is for. This type of loan is intended for people who need quick and immediate cash and want lower interest rates.

In this sense, the house can be given as security for paying the installments. Therefore, you can borrow the money for almost any purpose, securing the house and having fixed rates.

Should you apply for a home equity loan?

As you can see, the home equity loan is ideal for people who own a home. Therefore, you can have access to a significant amount by giving the house as security for the payment and use it however you want.

However, you may also have access to other types of financial aid, such as auto loans. In this sense, the allocation of the amount granted is reversed in the purchase of a car. Check out more in the post below.

woman and car

Auto Loans: all you need to know

Buying a new car is a dream for many people. What if there's no money? You can count on auto loans. Check out how they can help you!

About the author

Sabrina Paes

Content Writer, Copywriter, and Ghostwriter. Content marketing professional with 5 years of experience. Specialist in investment, finance, and technology niche. MBA in Marketing at the University of São Paulo, Brazil. Content Writer by Rock Content, and University of California (UCDAVIS).

Trending Topics

content

Start budgeting: 5 simple steps on how to start!

Want to get your finances under control? This article will show you how to start budgeting in 5 easy steps. Find out more about it here!

Keep Reading
content

Prosper Loans application: how to apply now!

Learn the details of the Prosper Loans application, what the requirements are, and the benefits of taking out a loan with the company.

Keep Reading
content

Custom Choice student loan review: is it worth it?

Do you need money to complete your studies? The Custom Choice student loan may be what you are looking for. Learn more!

Keep Reading

You may also like

content

Applying for the Chase Freedom Unlimited® Credit Card: learn how!

Learn how to apply for Chase Freedom Unlimited® card today and find out why this is one of the best cash back cards available in the market!

Keep Reading
content

Crypto with the most potential in 2022: great investment opportunities

Do you know which is the crypto with the most potential in 2022? Bitcoin has given way to other currencies like Ethereum. Read on!

Keep Reading
content

Applying for the Capital One Quicksilver Student Cash Rewards Card: learn how!

Apply for the Capital One Quicksilver Student Cash Rewards Card and get a no annual fee card with 5% cash back without having great credit.

Keep Reading