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Home Equity Loan Basics

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Important tips to keep in mind when considering a home equity loan

When it comes to finding the funds to cover those big expenses, whether it be paying for college, covering home improvements, taking that dream vacation or something else, the equity in your own home can be a great resource. Understanding the basics of home equity loans, however, can seem overwhelming. Here are some of the basics to help you better understand and utilize the equity in your home.

Home equity loans are best defined as a loan that you can take out against the value of your home; when you take out a home equity loan, the funds are paid out as one lump sum.

“A home equity loan is a second type of mortgage... These loans are often attractive because you can borrow relatively large amounts of money, and they’re easier to qualify for other loans because they are secured by your house,” according to Justin Pritchard, a financial specialist.

It’s important to keep in mind, however, that once you take out a home equity loan, you can’t take another one out in the future, even if you’ve repaid your loan in full. Here are some additional basics to keep in mind while you consider a home equity loan for your financial needs:

Home equity loans carry both benefits and disadvantages. Some of the benefits include lower interest rates, tax-deductible interest and larger loan amounts. However, home equity loans can also pose disadvantages for uninformed borrowers; these loans are secured with your house being the collateral. If you fail to repay the loan, your financial institution can take your property. It can also be tempting to use your home’s equity for frivolous expenses.

“Be sure to use your home equity only for the most important expenses,” Pritchard notes. “Things that will improve the value of your home or improve your income are good examples.”

When it comes to applying for a home equity loan, don’t assume that if one financial institution turns you down that you should give up. Try several different institutions.

“Many [financial institutions] also have cash and want to lend,” according to Donna Fulscado of Bankrate.com. “When looking for a home equity loan, be mindful of high-cost lenders or what the Federal Deposit Insurance Corp. calls "predatory lenders." If the offer is unsolicited or seems too good to be true, chances are it's not true.”

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