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Lifestyle: What Is A Home Equity Loan?

When you are looking to renovate or buy a second house, home equity loan might be a good idea. What is home equity loan, and how can you benefit from it? Let’s look deeper.

Home equity loan – what is it?

According to infochoice.com.au, home equity loans (or lines of credit) “are given to the home owners to renovate their home or to buy a second property. Home equity is the difference between the value of your home and the money you owe.”

For example, if you owe $200,000 and your home’s worth is $600,000, your home equity limit would be $400,000. You would be able to apply for a loan of up to $400,000.

As yourmortgage explains, the amount of interests you need to pay depend on how much money you are drawing out. For example, if you take out $100,000 to purchase a car, you would only need to pay interests calculated based on this amount instead of the whole $400,000.

The benefits of home equity loan

“People are using home equity for what they need [rather than] what they want,” Kelly Kockos, senior vice president of home equity for Wells Fargo said.

Home equity loans are mostly used for durable purposes, such as house renovating, vehicles, aged care accommodation and more.

The interest rates for home equity are also generally lower (ranging from 3.5-4.5%) than personal or credit card loans (starting from 6%).

Home equity loans also enable you to access large amount of fund that you can use or save to reduce interests. You have flexibility in managing repayments – it enables you to pay more than the minimum if you want to shorten the loan term.

The risks of home equity loan

You will need to be mindful about your daily transactions, as you have access to large amount of additional funds. If you are impulsive in making financial decisions, home equity loan might not be the right choice as it can increase your debt significantly.

Using home equity loan for investment or to lend to other people (e.g. relatives and family members) is also not recommendable, as you will be risking your own home in the process.