Is a Home Equity Loan the Right Option?

For many Americans, their home represents their biggest asset. When times get tough and you find yourself facing a big bill, you might be tempted to dip into your home’s equity to help get yourself out of trouble. This is, in essence, the purpose of a home equity loan. It is a second mortgage that allows you to borrow against the value you have built up in your property. Is a home equity loan the right option for you?

Benefits: When to Use a Home Equity Loan

The two biggest benefits of a home equity loan are that you can often get a low-interest rate on your loan because the loan is backed up by your property (as opposed to an unsecured personal loan). The second big benefit is that, assuming you have a good amount of equity stored in your home, you can take out a lot of money.

The best reason to take out a home equity loan is to cover a necessary cost while snagging as low an interest rate as possible. If, for example, you have a lot of debt on high-interest credit cards, you can consolidate that debt at a significantly lower interest rate with a home equity loan. The large amount of money you can pull from your house can also allow you to cover big expenses such as:

  • College costs
  • A new vehicle
  • Medical bills
  • A home remodel

Drawbacks: When Not to Use a Home Equity Loan

Any type of loan represents a risk. You are putting yourself further into debt and obligating yourself to pay one more monthly bill. A home equity loan is especially dangerous, because if you cannot keep up with your loan repayments, you could lose your house!

Before making the decision to take out a home equity loan, ask yourself these important questions:

  • Are you willing to put up your home as collateral?
  • Is whatever you want to spend the money on worth the debt obligation?
  • Are you financially stable enough to cover loan repayments for years to come?

Home equity loans should not be used for personal or luxury expenses. If you can’t afford the Ferrari, then don’t buy it.

If you want to move forward with a home equity loan, make sure you shop around to get the lowest interest rate possible. Even saving half a percent of interest could represent thousands in savings over the life of the loan. Check with your local bank and credit unions, and only work with a trustworthy lender.

Want more money advice? Start a Money Club near you and keep reading our Budgets and Planning article archive.

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1 thought on “Is a Home Equity Loan the Right Option?”

  1. Learned a long time ago – the hard way – that consolidating your debt via a home equity loan is not a financial best practices solution. Only borrow money if you can put it to work and make you more.

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