A Home Equity Loan (sometimes abbreviated to HEL) is a loan where a homeowner borrows money by using their home as collateral just the same as in a mortgage -- in fact a Home Equity Loan is a type of second mortgage. People who want to borrow a large sum of money or people who have bad credit find Home Equity Loans attractive. A Home Equity Loan should not to be confused with a Home Equity Line of Credit (or HELOC).If you have bad credit, then the Home Equity Loan may be your best chance of getting a loan because lenders see the risk of default (or at least the risk of them not getting their money back) as being low. They (the lender) have your house as collateral and if you default they'll sell your home, making back what you owe them (and then some). Given this risk, you (the borrower) are highly likely to make sure you repay the loan.
Home Equity Loans are attractive to borrowers -- here are the top three highs:
- Easier to qualify for if you have bad credit
- Borrowers can get large loans
- Typically have lower interest rates than credit cards or other types of loan
It's this risk that you should be most aware fo before considering a home equity loan. IF YOU DEFAULT ON YOUR LOAN YOU RUN THE RISK OF LOSING YOUR HOME! This is the No 1. pitfall.
Another thing to be wary of when it comes to home equity loans is that there are plenty of charletons who will be more than happy to cheat you from your money (or your home!) Make sure you know who you're doing business with, that they're reputable and their business is legitimate. If you feel in any way unsure, walk away and find another loan broker! There are plenty out there and this will help you not only find a legitimate broker, but also a better price.
Shop around for your Home Equity Loan. This could save you THOUSANDS of dollars. Go to banks, brokers, credit unions etc. and compare their offers with what you see on websites.
A cautionary note here though. If you see a good offer on a website MAKE SURE IT'S LEGITIMATE. There are plenty of scammers out there who will take you're money before you can bat an eyelid.
So while the Home Equity Loan may be attractive, there are also so lows to bear in mind:
- Your home is at risk if you default on your loan
- There are many scammers who will part you from your money or your home
- The first offer you get may not be the best. Try to avoid rushing into a deal.