Why would I get a home equity loan?
With a home equity loan - the ‘equity’ in your home refers to the amount you have left to repay on a mortgage subtracted from the current market value of your home. For some homeowners, this can add up to a considerable sum if they’ve been repaying their mortgage for quite some time or have completed mortgage repayments and own their home outright. This sum of money is, in effect, ‘locked in’ to your home and a home equity loan allows you to tap into that sum of cash to fund any purpose.
The crucial thing to bear in mind, however, is that this method of securing cash is not for everybody and careful consideration needs to be taken as you could be putting your home at risk if you’re unsure as to what it involves.
Why get a home equity loan?
Reasons for taking out a home equity loan can vary but quite often they are used to raise finance for things like extensive home improvement projects or major home renovations which, ultimately, will add significant value to your home anyway and which might possibly even work out to your financial gain in the long term over the cost of the loan.
Then there are other scenarios where, perhaps, a retired person or couple with a low income may need to raise cash to fund their monthly expenses. They may have fully paid off their mortgage and have no children to consider when it comes to any inheritance issues or they may have children but may not be looking to pass on any of their assets after they’ve died. In these cases too, home equity loan might present them with their best option. After all, they’ve worked hard to buy their home in the first place and have now paid it off. Therefore, as an asset it has a significant monetary value but it is tied up in their home’s value. This is typical of the scenario of “cash rich on paper but cash poor on a day to day basis”.
It cannot be emphasized too strongly, however, that a home equity loan isn’t for everyone and you should seek professional advice if you are considering opting to go down this route.