What’s a home equity loan?

Written By Melissa Cook
Sep 18, 2020
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What’s a home equity loan?

After years of making payments on a home mortgage, the home starts to build equity. A home equity loan is when the homeowner takes out a loan using the home as an asset to get a lower interest rate. Loans tied to assets will usually have lower rates than loans that are not. 

What’s the difference between a mortgage and home equity loan?

A mortgage (what is a mortgage?) is a loan people get when purchasing a home. An equity loan is more like a personal loan, where the borrower can use the money however they like. With an equity loan, the house is put up as an asset with the bank. 

Is an equity loan better than a personal loan for debt relief?

The major difference between a home equity loan and personal loan is, with an equity loan, you are putting your home up for collateral. In order to receive an equity loan, you will have to have a home with enough equity in it to take out a loan. 

Personal loans are not tied to any of your assets which makes them “unsecured” loans. Since unsecured loans aren’t tied to assets they tend to have higher interest rates over equity loans. 

Is a home equity loan a good idea?

A home equity can be a good idea if it’s used to increase the home’s value or reduce your debt. Some people will take out an equity loan for home improvements that ultimately increase the value of their home. Learn more about what is escrow. Other people might find it beneficial to pay off multiple high interest debts with a lower interest equity loan. Just be careful not to rack up the same high interest credit cards, this would lead to a worse debt situation.

Continue reading with our article on what is forbearance and how to refinance a mortgage.


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