You may be in need of another source of fund. One good way to get in is to tap your equity in your home. If you have accumulated substantial equity in your home, then you can use your home equity to borrow money. Taking out this type of mortgage loan by tapping your home equity is known as a home equity loan (HEL). This is a special category of the second mortgage loan. Here the loan amount is disbursed to you in lump sum and you are free to use the loan proceeds for whatever purposes you want.
Benefits of a HEL
1. A home equity loan is taken against your equity in your home. It is a secured loan as your home is kept as the collateral. Importantly, the rate of interest associated with a HEL is comparatively less than the rate of interest on an unsecured loan. Since the rate of interest is less, this offers you the chance to save money.
2. One important advantage of a HEL is that the interest that you pay on your HEL is tax- deductible. This helps you in the reduction of your taxable income and in turn helps you save money.
3. There are no restrictions on the use of HEL money. The loan amount can be used for a variety of purposes such as for funding the college education of a family member, for making home improvement, for debt consolidation, for paying the medical bills etc.
Drawbacks of a HEL
1. Here it is to be noted that a home equity loan is secured against your home equity. In case you fail to make payments, you may end up losing your home. Whereas, in case of an unsecured credit card debt, the loan is not secured by your home. Here, in the event of default, the chances of losing your home are not there.
2. Another disadvantage of a HEL is that it includes some additional fees. However, as per the Truth in Lending Act, lenders must disclose all the costs associated in a HEL.
Taking out a HEL is very common in the country. One important factor that will be checked very seriously while offering you a HEL is your credit score. Another factor that your lender will take into consideration is your equity in your home. Generally, you should have a home equity of at least 20% of the purchase price of the house so as to get approved for a home equity loan. The interest rate on the HEL is determined on the basis of your credit score. Here, it is to be noted that the rate of interest on a HEL is higher than the rate of interest on the original mortgage loan.
You need not necessarily have to take out the home equity loan from the same bank from which you have taken out the primary home mortgage loan. It is advised that you should shop around while taking out a HEL so as to get the best rate.