A Home Equity Loan

A home equity loan https://www.investopedia.com/personal-finance/home-equity-loans-what-to-know/ is also called a second mortgage. It allows homeowners to borrow money https://www.lendingtree.com/home/home-equity/pros-and-cons-of-home-equity-loan/ by leveraging the equity in their homes. You will keep your existing mortgage, but borrow against your home's equity in a one-time event.

It has similarities to, and differences from home equity lines of credit. Before you take a home equity loan, consider the pros and cons.

Pros of a home equity loan:

Interest rates on a home equity loan are usually fixed. This means that if interest rates rise, your payments on your home equity loan are not affected.

Interest rates on home equity loans are typically lower than the rates on personal loans, or credit card loans. The reason is because your home is used as collateral.

You will receive proceeds from the home equity loan in a lump sum. This works well for people who already know exactly how they want to use that money. The homeowner will be able to know exactly how much the loan will impact their budget in terms of costs and repayment of the loan.

You can use a home equity loan to start a business, pay for a vacation, to make home improvements, or whatever you want to use it on.

Cons of a home equity loan:

If you default on a home equity loan - your home is at risk! The bank can foreclose on you and take your house.

Home equity loans typically come with closing costs and fees. Sometimes, you can roll those fees into the loan amount.

Interest rates on a home equity loan are typically higher than they are for a home equity line of credit (HELOC). The reason is because with a home equity loan, you are trading a lower interest rate in exchange for stability in the rate you will pay over time.