Money is something that has to be managed with great care and consideration over the course of one’s life, and it’s easy for finances to spiral out of control or for sudden, unexpected costs to arrive. It’s no surprise, therefore, that more than 7 in every 10 people stress about their personal finances on a regular basis.
When you find yourself faced with a difficult financial situation, it’s important to understand that there are various sources of financial aid out there that can help you, including home equity loans. A home equity loan can be a great source of financial assistance for homeowners and can help you handle a range of money matters throughout your life.
But many people are unsure what exactly home equity loans are, how they work, and what they can be used for. To help you get a better understanding of home equity loans and what they have to offer, this guide will provide answers to some of the most commonly asked questions.
What Exactly Is Home Equity?
Home equity is basically the part of the home that you’ve already paid for and technically own. You can work it out by taking the total value of your home and subtracting the amount you still owe on the mortgage.
For example, if your home costs $350,000 and you still have $250,000 left to pay on the mortgage, you have $100,000 of home equity.
Equity is an important source of personal wealth for many people across the US and other parts of the world, and it builds up over time as your home’s value increases and you pay off your outstanding mortgage debt.
What Is a Home Equity Loan?
Now that we understand home equity, it’s easy to understand home equity loans. A home equity loan is essentially like a second mortgage that you take against the amount of equity you currently have.
So, if we refer to the previous example, the homeowner in question could borrow against $100,000 of equity, and this can be a very valuable source of financial aid for making big payments, covering unexpected costs, or even consolidating existing debts.
How Do Home Equity Loans Work?
With a home equity loan, you borrow against your current home equity, so you can potentially access a large sum of money, and your home is used as collateral for the loan. This comes with both pros and cons.
On the plus side, it makes the application process a lot easier and since the loan is secured by your home, you can get some very good rates too. Plus, it’s possible to claim tax deductions depending on how you use the money from the loan.
On the downside, your home is quite literally on the line in a home equity loan and you could lose it if you fail to keep up with payments. What’s more, if you choose to sell your home, you have to pay off all outstanding home equity loan debt right away, along with closing costs.
What Can I Use a Home Equity Loan for?
There are many potential uses of a home equity loan. Here are a few examples:
- Home Improvements – The primary reason why people take out home equity loans over personal loans or other types of loans is to make improvements to their homes like kitchen renovations or roof repairs. You can claim tax deductions on the interest paid if you use a home equity loan for this purpose.
- Consolidation – It’s also possible to make use of a home equity loan to consolidate your existing debt and make it more manageable, as well as possibly getting a better rate.
- Tuition – Many parents make use of home equity loans to fund the tuition of their children when it’s time to send them off to college.
- Emergency Costs – You can also consider using a home equity loan to cover unexpected emergency costs like medical bills, auto repairs, or living expenses if you find yourself out of work.
- Weddings – Many couples also consider taking out a home equity loan to cover the costs of their wedding, and this can be a good method, especially with average wedding costs being close to $20,000.
Home equity loans can be a very important source of funding in a wide range of situations, not only for home improvements, so it’s worth considering this kind of loan if you need cash to cover emergencies, weddings, tuition, or other expenses.