It is very typical for home-owners in the United States to have their houses on mortgages. There are some who buy houses in cash but if you are a working class American, you probably belong to the majority group where mortgage is the way to go. Over time, you can build home equity by consistently and regularly making your monthly mortgage payments that are required of you. Depending on the mortgage package you took, after a number of years you may have probably built home equity by at least half. For example, you may have bought a house that was priced at $300,000.00 and after a few years you only have a balance of $100,000.00 to pay. This means you have $200,000.00 in home equity that you can use for other purposes. How do you do that? Home equity loans (sometimes abbreviated as HEL) are the way to go.

Simply defined, a HEL is like a second mortgage you take on your house to help fund your other needs such as house renovation or purchase of a second home. Similar to your first mortgage, you will be putting your house as collateral to apply for a loan and you can enjoy the benefit of lower interest rates than a conventional loan. If you have a low credit score, chances are it will be easier for you to qualify for a HEL than conventional loans with no collaterals. After all, you will be giving your lenders something to hold on to should you be unable to make payments for your loan. Done the right way, your home equity loan payments could even be tax deductible. You may check your local registered lenders to see if you can enjoy these particular benefits.

Before you decide to take a second mortgage to your house, it is advisable for you to really consider all options and make sure that the risk of you having to foreclose is at the minimum. This all depends on the purpose of you taking a home equity loan. For example, if you wish to remodel your house to upgrade its value and increase its selling price then this is the best way for you to fund your project. However, if you are looking to consolidate unsecured debts such as credit card debts it may be better for you to look for other options because if you fail to make regular payments you will risk foreclosure. Whatever the case, you have to make sure that you are able to make payments regularly to avoid losing your home.

It’s important not to confuse home equity loans (HEL) with home equity loan lines of credit (commonly called HELOC because although the concept of both loans is almost similar, there are several differences that you may like to take note of:

– The money for HEL is given as a lump sum while HELOC is usually distributed as needed usually with the lender giving you a checkbook or a credit card for you to make purchases with.

– There is usually a closing cost for HEL while there is none for HELOC. However, you have the option of finding out with HEL providers that do not charge closing costs.

– The interest rate for HEL is often fixed for life. HELOC on the other hand has fluctuating interest rates depending on the current market situation.

You may also like to take note that there is a higher risk of foreclosure if you are taking a HELOC to consolidate your existing debts especially if they are unsecured debts.

Granted, the interest rate is considerably lower than that of debt consolidation loans but you may not want to risk losing your home to pay off credit card debts. This is why it is recommended that you only put your house as collateral for something that will benefit you financially such as upgrading the condition of your house to increase its value.
It may be important to bear in mind that there is no one-size-fits-all guideline for you to decide whether to take a HEL or a HELOC. So you need to do your own research on the best home equity loans or home equity line of credit options before making a decision. It might be a good idea to talk to the providers and understand the benefits and the risks of each option so that you will be making an informed decision and not put yourself or your family at financial risk.

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