Equity Loan

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The Versatility of an Equity Loan

We get questions from consumers constantly about home equity loans. So we thought we would use the most recent example to try to provide an overview.

Hi there,

I recently had my house reappraised and was told that its value has increased by $45,000. This is fantastic news but I sure could do with a little bit of that to make some changes round here. My neighbour told me I could take out an equity loan, but can they be used for what I want or do they have to be used on the house? Are there different types of equity loans available?

Hope you can help


Our Reply:

Hi Bob, thanks so much for your question. I hope this answer helps you to understand what an equity loan is, what types of equity loan there are and how they can be used.

In summary, an equity loan is a loan borrowed against the equity of your home. Equity is the current market value of your home, minus any mortgage balance.

There are two types of equity loan. These are a closed end or fixed term loan and a home equity line of credit.

  • Home Equity Loan

A lump sum loan, which you pay off in monthly instalments, and has a fixed interest rate. This is pretty similar to many other types of loan available such as an auto loan or a personal loan

2. Home Equity Line of Credit

The second works more like a credit card. The equity loan amount and the time limit is set by the lender but you can draw down the money as and when it suits you. These have variable interest rates and the payment amount will vary depending on how much you have borrowed.

The main advantage to an equity loan is that because they are secured against your home they are considered in a far lower risk category than an unsecured loan. They tend to have much more favourable interest rates than unsecured loans and credit cards.

Finally, an equity loan can be used for just about everything from debt consolidation to vacations. According to the Consumer Bankers Association 44% of us use a home equity loan for debt consolidation, with the other popular uses being home improvements, vehicle purchasing and education expenses such as tuition costs.

So as you can see, an equity loan is very versatile! The only risk to you is that if you do not keep up the repayments they have the right to take your home as collateral against the loan. If you feel that you cannot manage an additional monthly repayment other than the financial obligations that you currently have, do not risk losing your home.