What is an equity loan?

Answer

A home equity loan is the same as a second mortgage on your house, and you are borrowing against the equity in your dwelling. The equity is the difference between what you owe on your mortgage and what your home is currently worth.

Does it require a monthly payment?

The loan is for a specific amount and requires a monthly payment, just like your primary mortgage. In essence, you are putting your house up as collateral, so if you default, the lender can take your property.

Is it a good idea?

Whether or not it’s a good idea depends on the situation. It’s probably not a good idea to use the equity in your home for a fairly frivolous reason, such as a vacation. If you need money for a particular purpose, such as home repairs, college tuition or medical bills, tapping into your home’s equity may make sense. Like a primary mortgage, the interest on a home equity loan is tax-deductible.

Last thoughts

A home equity loan is similar to but not the same as a home equity line of credit, or HELOC. A HELOC is more like a credit card, in that you have the line of credit to borrow against when necessary.

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