Home equity loans are disbursed and can be used for almost any purpose, but don’t overlook the risks. If you default on your loan, you could risk foreclosure.
Home equity loans, also known as second mortgages, use the equity you’ve built up in your home as collateral for new loan funds. Similar to mortgages, lenders dispense your loan in one lump sum that you typically repay in monthly installments. The interest rates are usually fixed, which means you make the same payment each month.
Most lenders let you borrow between 75% and 80% of your home’s equity, which can be used for almost any reason, like making home improvements, covering an emergency expense, paying for college, and more. For example, if you have $150,000 in equity, $112,500 to $127,500 may be available to you, depending on your credit profile.
The credit limit you can tap into is determined by how much equity you have in your home. The term or number of years you can access the equity is called the draw period. Both a HELOC and home equity loan use the equity in your home to secure the loan or line of credit. The interest rates are also often better than those of personal loans, most credit cards, and other unsecured debt.
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