All About Home Equity Loans

Home equity is defined as the difference between how much you owe on your mortgage and how much your home is worth. That said, a home equity loan (HELOAN) is a loan type in which the borrower uses the equity of their home as collateral. While these loan types have some of the lowest interest rates available, they also come with risks. Below is a resource guide to help you better understand home equity loans.

Best uses

Home equity loans allow you to acquire a large amount of cash upfront. They’re great for non-recurring expenses or one-time needs. According to Bankrate.com, one of the best uses of HELOANs is for emergency repairs, as you’re securing the future value of your home in the process. Similarly, they’re great for home improvements because you’re using them to increase the value of your property. Home equity can also be an excellent way to finance a land purchase, especially if you are planning to build a home. Building a home on a parcel of land can improve the land’s value. That said, HELOANs may offer better interest rates than construction or land loans, making them a fruitful option to consider. 

Worst uses

Although home equity loans provide a lump sum you wouldn’t typically have access to, you shouldn’t use them for just any purchases. Having said that, it’s never a good idea to use HELOANs to finance everyday expenses in your household budget. Doing so is only a temporary solution to a longer-term problem, as these loan types still need to be paid back. Failing to keep up with these payments could put you further in debt. It is also advised not to use these loan types for purchasing a new vehicle, as vehicles lose value over time. Similarly, using HELOANs to fund vacations or pay off credit card debt indicates you may be spending beyond your means, which may only increase debt problems. All in all, opening a home equity loan is a bad idea if the payments are overwhelming, or only serves to shift debt around.

Risks

As stated, HELOANs use your home as collateral. That said, defaulting on payments could allow your lender to foreclose on your home. Before taking out a home equity loan, ensure you have sufficient income to make regular loan payments. You should also make certain you can still afford payments if your income or financial situation were to change. Further, it should be noted that home values can change at any time. If it were to lose value while paying off a HELOAN, you could end up owing more than what your home is worth. Likewise, paying back the minimum amount allowed at a time could make payments down the line incredibly difficult. Although making regular payments on HELOANs can strengthen your credit score over time, keep in mind that opening one could negatively affect it in the short term. 

Safeguards 

While home equity loans come with risks, there are ways you can protect yourself. One of the easiest ways to do so is by borrowing only what you need. Remember, HELOANs use your home as collateral, so it’s crucial to borrow in a way that makes regular payments affordable. It’s also important to prevent yourself from spending home equity loans too liberally. These loan types can make it feel as if you have a plethora of money at your disposal, which is why it’s wise to create a budget and stick to it. That said, ensure this budget includes regular loan payments so that you can chip away at the balance. You should also consider paying off the principal during your loan’s drawing period, as it can save you money in the long run. As with all loans, be sure to monitor your credit score in case of significant changes. 

Alternatives

While home equity loans can supply capital when you need it, they’re not the right choice for everyone. Personal loans, for example, are often easier to acquire and access. Even so, personal loans usually come with higher interest rates and shorter repayment terms. They also do not provide you with as much money as home equity loans. Likewise, credit cards are usually a viable option if you’re looking to purchase something now. Just be sure to review your credit card’s interest rate and credit limit. Also, ensure you pay the balance in full so you don’t succumb to credit card debt. Cash-out refinances, or onboarding a larger mortgage can also supply you with extra cash. 

Gulf Winds offers fixed-rate home equity loans available in 5, 10, and 15-year terms. We also offer home equity lines of credit, a great option for recurring payments like medical bills or tuition. If you’re looking to put the equity in your home to good use, this is an excellent way to start!

Looking to open a home equity loan? Gulf Winds can help you out. 

Hunter Morrison

About Hunter Morrison

Hunter has freelanced for various print and radio publications across Northwest Florida, including The Bay Beacon, Navarre Press, Inweekly, Crestview News Bulletin, and WUWF. He was also the Editor in Chief of the University of West Florida’s student newspaper, The Voyager. In 2023, Hunter moved to Kenai, Alaska to take up a news reporting position with KDLL Public Radio. For fun, Hunter enjoys cross-country skiing, hiking, photography, thrifting, traveling, and looking for the best Thai food around.