How Does a Home Equity Loan Work and
This is a different type of loan than a home equity line of credit (HELOC). The latter works very much like a credit card. That is, the 2nd mortgage lender makes a certain amount of credit available based upon the equity in your home. The line of credit is available as you need it over a certain term, such as five or 10 years. The repayment period can be up to 20 years, and the rate is adjustable with market fluctuations.
A HELOC credit line could be the choice for you if you need to borrow smaller amounts over a longer period. If, for example, you need funds to pay for a home renovation project, you might get a HELOC of $25,000 and draw it over time as it is needed.
During the housing bubble from 2000-2007, some consumers tapped their home equity to pay for everything from vacations to car to kitchen renovations. Some also used these loans to cut their credit card debt. The theory there was to get rid of high interest debt and pay off debt at a much lower interest rate.
These spending habits relied upon home values continuing to rise. When the market crashed, their homes were worth much less than they paid for them. Many people lost their homes.
So, when you are thinking about a home equity loan or line of credit, you should carefully consider if it is a smart use of your home equity. With those thoughts in mind, experts currently consider these uses of home equity to be either a good or bad idea:
Borrowing equity from your home with a home equity loan or line of credit can make sense, but you have to carefully look at why you are borrowing the money before pulling the trigger.
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