What is a home equity loan?
A home equity loan (sometimes called a HEL) allows you to borrow money using the equity in your home as collateral.
Equity is the amount your property is currently worth, minus the amount of any existing mortgage on your property. You receive the money from a home equity loan as a lump sum. A home equity loan usually has a fixed interest rate–one that will not change. If you cannot pay back the HEL, the lender could foreclose on your home. If you are considering taking out a HEL to pay off your debts, you should explore alternatives with a credit counselor that do not potentially put your home at the risk of a forced sale. Moreover, home equity loans may have upfront fees and costs, so be sure to compare more than just your monthly payment when shopping around.
Before taking out a home equity loan to consolidate your debts, talk to a qualified credit counselor to help you weigh your options.
Look for a non-profit credit counseling organization that can:
- Advise you on managing your money and debts
- Help you develop a budget
- Give you free educational materials or workshops
Avoid firms that ask for big fees up-front or that make unrealistic promises–like restoring your credit or repaying your debts for pennies on the dollar.
Tip: Be careful about borrowing against your home as part of an investment strategy. There is no such thing as a “risk-free” or “guaranteed” investment. You should carefully consider all your options before you borrow against your home to invest. All investments can lose value and that could put your home at risk if you cannot repay the loan later on.