Home Equity Loans: How They Work and How to Use Them

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One of the many benefits of owning a house is the opportunity to build up your equity. The property’s equity increases as you make payments against the mortgage balance, or as the property value appreciates. The good news is that home equity usually increases over time. It can also be used to access funds.

Here’s an overview about how you can tap into your home equity, what a home equity loan is and how it works.

What is home equity?

Home equity is the difference between the appraised value of your home (how much your property is currently worth) and how much you owe on your mortgage. Or in other words, it’s the portion of your property that you have paid off and you own. Your home equity increases every time you pay off your monthly mortgage, when you add value to your home through renovations, and when the general property market increases. The equity you accumulate can be used to obtain funds in the form of a home equity loan.

What is a home equity loan?

Banks and private lenders like Mango Credit let homeowners use their home equity as security when taking out a loan. This home equity loan becomes available as a lump sum of cash that usually comes with a fixed interest rate. The amount you can borrow will depend on how much equity you have in your home. A home equity loan is usually repaid with equal monthly payments over a fixed term. 

Where can you use a home equity loan?

Home Equity Loans

A home equity loan allows you to borrow against the equity in your home. Accessing the equity in your home can be used for various purposes, including:

  • Home renovation. Home equity loans can be used to finance renovations that make your home more comfortable or suitable to your needs, as well as increase the value of your property (which then, in turn, increases your equity).
  • Investment. A home equity loan is often used as a deposit for an investment property.
  • Debt consolidation. A home equity loan has lower interest rates than a credit card and is regularly used to consolidate high-interest debts and reduce monthly repayments and interest fees.
  • Cash flow management. A home equity loan can help if you run into an unexpected expense, such as a large medical bill or a tax payment for your business.

What are the advantages and disadvantages of a home equity loan?

If you’re thinking about getting a home equity loan, here are some pros and cons that you may want to consider. 

Advantages

  • Easy to obtain. Taking out a home equity loan is easy as long as you have your property.
  • Lower interest rates. With your home as security, a home equity loan has lower interest rates than unsecured loans like personal loans. 
  • Fixed repayment terms. With fixed rates, payments are predictable. You know how much you’ll have to pay monthly, which makes budgeting easier.
  • You can quickly access the funds. With a simple application process, funds can be accessed quickly.
  • The fund can be used for any purpose. You’re not restricted on how to use the lump sum received.

Disadvantages

  • Less flexibility. Compared with a home equity line of credit, a home equity loan has less flexible terms.
  • Increased debt. You may have gained access to immediate funding, but a home equity loan is still an addition to your debt and increases your monthly repayments.
  • Closing costs. You may need to pay for closing costs and fees.

If you have owned your house for a few years already, you’ve probably built up your equity. You can use this equity as a valuable resource when you need quick access to funding. With the help of a suitable lender, you can surely put this asset to good use. So be sure to choose your lender wisely.

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