What Are the Advantages of a Home Equity Loan?

by Sandy Baker ; Updated July 27, 2017

A home equity loan allows homeowners to borrow money using the equity in their home. Equity is the portion of the home's appraised value that remains after subtracting the balance of a mortgage. Some lenders allow borrowers to borrow up to 85 percent of that value, which may allow many homeowners to have accessible cash for major purchases at a low cost to them. A home equity loan offers several advantages compared to using credit cards, personal loans or other types of credit.

Credit Requirements

Home equity loans are easier to qualify for than some forms of unsecured credit. A home equity loan is a secured loan, which uses your home as collateral to secure the loan.This places more risk on the homeowner than the lender--defaulting on the loan could lead to foreclosure. Because of the lower risk to the lender, the loans may not require a high credit score. Lenders take your credit ratings, income and other debt into consideration before issuing the loan.

Costs

A home equity loan can be less expensive than unsecured debt since interest rates are usually lower. Interest rates for home equity loans are comparable to home loan interest rates, which are significantly lower than unsecured loans. Interest charges may be variable or fixed, which could affect the actual cost of the loan. Keep in mind that home equity loans have closing costs and appraisal fees.

Tax Advantages

Like a mortgage, the interest paid on a home equity loan is tax-deductible. Check with a tax professional to see if you would qualify for the tax savings before obtaining a home equity loan.

Flexibility

Home equity loans may be used in virtually any way necessary and needed. The funds can be used for home improvements and are one of the most affordable options for consolidating high-interest debt. Individuals can borrow the funds to take a dream vacation, purchase an investment or start a business. Home equity loans are also accessible as a line of credit. Again, remember that not repaying this loan could lead to the lender foreclosing on your property.

Readily Accessible

Home equity loans can be a reserve fund for an emergency. Obtaining a home equity loan can occur quickly. These loans can provide the borrower with a sizable amount of money to borrow against, depending on the value of his home.