What Can a Home Equity Loan Be Used For?

Home equilty loans and home equity lines of credit are common types of second mortgage loans.

Home equity loans, often called second mortgages, are popular consumer loans in which you borrow money against the equity in your home, with the property as security. Home equity loans and lines of credit are common types of loans.

Function

Home equity loans and lines of credit are generally open for use at the consumer's discretion. Banks and lenders push equity loans and lines of credit by enticing borrowers with home improvement funds, vacations and more. If a bank has credit concerns, it might require more explanation of intended use for a loan.

Types

Home equity loans are lump sum loan distributions, similar to first mortgages, that must be repaid on an amortization schedule (principal and interest). They are most often used for debt consolidation or home improvements, according to Bankrate. Home equity lines of credit (HELOC) are similar to credit cards in that you have open credit access up to your limit. Your risk is greater as your home has an additional property lien.

Risks and Benefits

Inherent risks exist with home equity loans since you are borrowing additional funds against your property. Creditors generally have modest risk. The major benefit of a secured loan is your rates are typically lower than with unsecured debt (like credit cards). This is why home equity loans are often used for debt consolidation.

References

• Bankrate: Why and When to Use Your Home's Equity
• MSN Money: 5 Tips for Wisely Tapping Into Your Home's Equity