Home equity loans are simply additional mortgages. They use the equity in your home as the collateral to secure a loan. There are two main ways to tap into your home equity: through a home equity loan (second mortgage) or a home equity line of credit.
Home equity loans are attractive because lenders often charge a lower interest rate. Tax-deductible interest is another carrot lenders use to entice homeowners into using home equity loans.
Don’t get a home equity loan without understanding the risks. If you can’t pay a credit card bill, the issuer can take you to court and sue you for recovery. With a home equity loan, however, failure to pay could cost you your home.
Home Equity Line Of Credit
Think of a home equity line of credit (HELOC) as a giant credit card. You can borrow whenever you want and as much as you want—up to the credit limit. Your monthly payments are based on the amount you borrow.
The advantages of a HELOC are similar to a home equity loan: lower interest rates, tax-deductible interest, and lower closing costs than with refinancing a mortgage. The major downside to using a HELOC is that it can be a huge temptation. Just like a credit card, the tendency is to use it too often, rather than spending carefully.