What Is a Home Equity Loan?

If you own or are considering purchasing a home, you’ve likely heard the words “home equity loan.” If you’re like most people, however, you don’t have a clear understanding of what this means. While many people assume that a home equity loan is like a mortgage, this isn’t exactly true.

What Is a Home Equity Loan?

A loan that people take out against the equity of their home is known as a home equity loan. Typically, home equity loans are paid out in a lump sum that the buyer pays off, like a mortgage, over a set period of years or months.

Once a buyer has taken out a home equity loan, the option to take out more money from the loan doesn’t exist.

Why Use a Home Equity Loan?

While there are dozens of reasons to use a home equity loan, some of the most popular include the following:

1. To renovate a home

Many people take out home equity loans to renovate or improve their homes. When a loan taken against the home’s equity is used to go back into the home in the form of upgrades and improvements, it’s generally considered a smart use of money.

What’s more, home equity loans used in this fashion often pay off in the long run, since they can produce higher home values and a more attractive price in the event that you decide to sell the home.

2. To invest in other accounts

Some people take out loans against their home’s equity and then use the funds to invest in other accounts. As long as the other accounts you invest in promise a high return, this is generally considered a wise idea. Ideal for anyone who wants to use their home’s equity to build wealth, this approach offers a wonderful option for people interested in getting a higher return on their money.

3. To use as retirement income

Some people choose to use the equity in their home as a source of retirement income. While some financial advisors say this is a fine idea, others recommend staying away from it since anyone who uses this option will eventually have to make payments on the loan, which can be difficult for retirees to swing later in life.

If you are going to take this option, just be sure to research the pros and cons and speak with a financial advisor first. While it can be a smart move, it can also be risky.

Home Equity Loans: A Great Option for Some

While they can be risky, home equity loans are a wonderful idea for some consumers. By understanding the ins and outs and being responsible with the funds rendered by a home equity loan, homeowners can make the most of these helpful financial options.