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Advantages and Disadvantages of a Home Equity Loan

Lisett Comai-Legrand

Lisett Comai-Legrand About The Author

Jul 17, 2017 6:51:00 AM

What is home equity? Home equity is the market value of your property minus any remaining mortgage payments. It is one of the biggest sources of net worth for most property owners. With time, the value of your property increases, which means your equity amount increases over time as well. 

If your neighborhood or your home improves in quality, your home may be appraised at a higher price than what it was originally purchased for. You can use the same formula, current market value minus remaining mortgage to calculate your home equity amount.

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What Is a Home Equity Loan?

Piggy bank and houseA home equity loan is a loan that uses your home's equity or your property's worth as collateral and allows you to borrow against it. It serves as a guarantee that you will repay the money. The financial institution reserves the right to evict you from your house and auction off the property if you fail to repay the loan in time. You should be very cautious while applying for a home equity loan or line of credit against your home since it can be a risky move. The consequences can be dire if you don’t pay it back.

What Is a Home Equity Loan Used for?

Home equity loans generally have a time period of 5 to 15 years to repay the debt. If used properly, home equity loans can be very beneficial. There is a slight difference between home equity loans and a Home Equity Line of Credit (HELOC). While home equity loans provide you with a lump sum of money, a HELOC covers short-term expenses.

Taking out a home equity loan can bring several advantages and disadvantages. Here is a list of factors you should consider while deciding on taking out a home equity loan.

While a home equity loan might seem like a smart financial move in some conditions, you must think through it thoroughly beforegetting one. Keep in mind that your house is at risk of foreclosure if you can’t pay back your loan.

Try to keep your options open while applying for a loan and find out if there are less expensive ways for you to borrow money. There are many financial institutions that offer different interest rates on home equity loans. Make sure to go through all of them to find the best option for you. Also try to consider other types of loans if a home equity loan is something that doesn’t suit your financial needs.

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We do our best to provide helpful information but we cannot guarantee the accuracy or completeness of the information presented in the article, under no circumstance does the information provided constitute legal advice. You are responsible for independently verifying the information if you intend to use it in any way. Additionally, the content is not intended to be reflective of First Alliance Credit Union’s products or services, for accurate and complete details about our product and service information you must speak to an advisor at First Alliance Credit Union.