First Federal Bank Blog

When you need to quickly acquire cash to fund a major purchase, you have an array of means available to you. And if you have a house, one of those options is a home equity loan.
 
What is a home equity loan?
 
A home equity loan is also called an equity loan, home equity installment loan, or second mortgage. This type of loan lets you use the share of your home that you own. You borrow money from a lender by using your home as collateral, basing your allowance on the portion that you’ve paid off — or the entire thing if you fully own your house.
 
This lets you take out a loan by using your home as collateral. It’s not a risk that should be taken lightly if you’re unsure that you can repay it, as a home equity loan could put you at risk of foreclosure. But, for homeowners with a stable financial situation, it can provide a lump sum of money quickly and more securely than other types of loans.
 
How is this different from a home equity line of credit?
 
A home equity line of credit — or HELOC — sounds very similar in name to a home equity loan, but it functions a bit differently. As Nerdwallet reporter Holden Lewis explains, “Rather than borrowing a lump sum all at once, a HELOC is similar to a credit card. You have a certain amount of money available to borrow and pay back, but you can take what you need as you need it. You’ll pay interest only on the amount you draw.”
 
A HELOC lets you draw funds against your home gradually for a longer period — over 5-10 years — and then repay the amount borrowed after the window closes. You’ll also pay interest payments based on a variable rate during the window and afterward as you repay the principal.
 
Why would you get a home equity loan?
 
Of all the ways to obtain funds to cover an expense, when should you consider a home equity loan? Investopedia journalist Julia Kagan says, “Low interest rates and possible tax deductions make home equity loans a sensible choice for responsible borrowers.” These interest rates tend to be much lower than rates on credit cards and other consumer loans.
 
Consider a home equity loan if you know exactly how much you need to borrow to achieve a specific goal like remodeling your house. Otherwise, one could perpetuate a cycle of spiraling debt because it’s so easy for a homeowner to obtain.
 
How do you get a home equity loan?
 
Kagan identifies three requirements a home equity loan application typically requires for approval: verifiable income history for 2+ years, a credit score greater than 600, and equity exceeding 20% of the home’s value.
 
The lender will appraise your home based on its current market value and compare that to the share you own. Then you will be offered a percentage of that equity to borrow in a loan, generally up to 85%. You’ll then have to repay the loan over an established period with a fixed interest rate and predictable monthly dues.
 
Is a home equity loan right for you? Or would a personal loan or HELOC be a better solution for your financial situation? Speak to a financial expert who can provide guidance.