Is a Home Equity Loan the Right Choice for You?

house with family

You may have heard recently that the values of homes are rising. If you own a home, this is good news, though it may not immediately be apparent why this is. You would get more money if you chose to sell your home, but what benefits can you get if you have no interest in moving now? Rising property value also improves home equity loans, which can be an excellent way to leverage your property without losing it. Home values fluctuate all the time, so keeping an eye on the market can help you decide when taking out a home equity loan is a good choice. There are many other factors that affect the viability of this kind of loan, so it’s a good idea to learn more about it so you can decide if this is the right option for you.

What Is a Home Equity Loan?


Essentially, a home equity loan is when you borrow against the equity of your home. Home equity is the market value of your home with all debt you owe on it subtracted. For example, if your home is worth $200,000 and you still have a mortgage of $75,000, that means your home equity is approximately $125,000.

In reality, it is a little more complicated to calculate your home equity. For starters, you need to get an accurate value estimate for your home. Because property value fluctuates, this won’t be the same as the amount you paid for it. There are two primary ways to get this value. The first is to hire an appraiser. This will yield the most accurate market value possible, but it is also quite expensive to hire one. You should expect to pay between $200 and $400. The other option is to get a real estate agent to appraise your home. This is usually a free service, but it will also be less accurate.

Finally, a home equity loan can come in two varieties. You can either receive a lump sum of cash or a line of credit. Both options have their own advantages. Receiving a large amount of capital is useful for undertaking large projects or expenses, like improving your home, starting a business, or purchasing a vehicle. On the other hand, a line of credit provides a steady resource that you can borrow from at your own discretion up to the limit. You can also pay a line of credit off at any time, similar to a credit card, making it more flexible.

What are the Pros and Cons?

A home equity loan is not for everyone. Like any other type of loan, there are risks involved. However, if you choose to take one out at the right time and are responsible with the capital you receive, it can be an incredibly useful tool.


  • Lower interest rates than many other kinds of loans
  • Tax deductible interest
  • Potential qualification for tax credits or other deductions
  • Unchanging interest rates, meaning monthly payments never increase
  • Taking advantage of otherwise inaccessible home value


  • Increases your debt
  • Puts your home up as collateral

It is also important to realize that many lenders offer adjustable rates for a home equity loan. This can be seen as both an advantage and a disadvantage. It means that you can start the loan at a lower interest rate, but your interest rates are subject to the ever-changing national prime interest rate. Your monthly payments may increase or decrease unexpectedly if you choose this option.

When Do You Need One?

couple and home loan

At this point, you are probably trying to decide if a home equity loan is the right choice for you. The first thing to consider is how much debt you already have and how feasible it is that you can pay it off. Remember, if you are unable to pay back this loan, the lender will take your home as payment. That is an enormous consequence, so you should never enter into this kind of loan haphazardly. If you already have quite a lot of debt, adding more on top of it may put you in a dangerous situation. It may not be suitable for simply making a purchase. However, paying costs that will earn you money in return, such as starting a business, may be a better idea.

 Generally, the best reason to take out a home equity loan is to reduce your total debt. If you are making many monthly payments to several different organizations, the low interest rates of an equity loan mean you can pay off all your debts and owe less overall. This is called consolidating debt. Afterward, you only have one monthly payment and its interest will most likely be lower. Consolidating your debt in this way has the added benefit of improving your credit score over time.

How Can You Avoid Fraud?

Keep in mind that there are many home equity frauds out there. If anyone is trying to sell you on taking out a loan, you should be wary. The safest place to receive a home equity loan is the same bank or organization that secures your mortgage. If you choose to go with a different company, always research it first.

Do You Know Your Credit Score?

Before you apply, take a close look at your credit score. Your credit score will fall somewhere between 300 and 850, and the higher the number is, the better. Having a score above 700 will yield the best interest rates. If you fall in the 600s, you can probably still get approved, but your rates may be higher. If your credit score is below 600, it may be difficult to get approved for a home equity loan.

If you have a low credit score and want a home equity loan or any other type of loan, it’s a good idea to work on your credit before applying. Contact today for a free credit evaluation to see how we can help you.

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Sources: | TheStreet | LendingTree

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