If you have built up significant equity in your home and are wondering how to borrow money using your home for the impending big expense, then home equity loans and lines of credit can be just the products for you. They are easy to get, as lenders are more than willing to give you these low risk loans against your home. Especially when the interest rates are low in the market, these loans provide great value.
Let’s first understand how these loans and lines of credit work:
Home equity loans: These are loans or second mortgages taken against the equity owned by you in your home. The rate of interest on these loans is lower as compared to personal or other unsecured loans because your home equity can be used as collateral to recover the loan amount due in case of non-repayment.
Home equity line of credit: This is a line of credit opened up for you against your home equity. You can draw money from this available credit line, as and when the need arises. The interest rate on this line of credit is much lower than your regular credit cards or other credit lines, as it is secured by an immovable asset – your home.
Home equity loans are useful when you have to make big investments and need funds for them. For example, undertaking home improvement or paying for college. In both these cases, the sum required is big and qualifies as good debt. You should avoid taking home equity loans for day to day expenses or indulging in luxuries. After all, you are putting you most valuable asset on the line to draw funds.
Home equity line of credit is a good financial solution when you are faced with financial emergencies. For example, if you want to save your car or education loan from going bad, you can use this line of credit to pay for it. Or if you have to make a big, unavoidable purchase, you can use this line of credit, but make sure it’s a necessary expense and not a whimsical one.
It’s important to remember that knowing how to borrow money using your home is not enough; you should also know how to do it smartly and with minimum risk.