What is a home equity loan?

Home equity loans explained

Home equity loans are commonly advertised on television as being easily attainable and inexpensive. If you are unfamiliar with this type of loan, however, you may find yourself wondering what exactly it is and whether or not it is right for you.

The premise is actually quite simple. The equity in your home is the amount your home is worth minus any money owed on the home. An equity loan cashes in the available equity and uses your home as collateral for the loan. Home equity loans can be used for just about anything: Debt consolidation, home improvement projects, or perhaps even funding a vacation or other event.

Borrowers like home equity loans because the interest paid on the loan is sometimes tax deductible, and lenders like home equity loans because borrowers are statistically less likely to default if the loan is attached to their home.

The downside of this is that a default on a home equity loan can result in a foreclosure, even if the first mortgage is paid promptly. For this reason, a home equity loan is not something that should be utilized just because the money is there and is available.

Like all loans, home equity loans must be utilized wisely. The equity in your home should be seen as more of a safety net than as free money.