What are home equity loans?

As you pay down your mortgage, you gain equity in your home. Home equity is the difference between your home’s current value and the amount you still owe on your home loan. For example, if your home is currently valued at $400,000, and you still owe $150,000 on your loan, your home equity stands at $250,000.

Say you need some cash to complete a home remodel project you’ve had in mind for years, or perhaps you’d like to finally pay off some debt. Assuming your home equity is a positive number, congratulations! There is usable value that you can take advantage of. Homeowners with a high enough amount of home equity are eligible to take out a loan by borrowing against their home equity, making it possible to access helpful cash reserves as needed.

There are three major loan types that utilize your home equity -- home equity loans, HELOCs, and cash-out refinance loans. Each of these comes with their own requirements as well as their own list of pros and cons for you to consider. Here’s a quick breakdown:

• Fixed home equity loans

Fixed home equity loans are a type of second mortgage that allow you to borrow a lump sum based on your home equity, which you then pay back at a fixed rate. Your monthly payments will be added on top of your usual mortgage payments. To learn more, click here.

• HELOCs

Similarly, HELOCs are another type of second mortgage that allow you to utilize your home equity. These loans, however, usually come with an adjustable rate, and the money you borrow is doled out in smaller amounts over a period known as the draw period. For more on HELOCs, click here.

• Cash-out refinances

Finally, a cash-out refi is a loan that completely replaces your current mortgage. How much you borrow is determined by the difference between your old mortgage loan and your new loan. Interested? Click here to learn more.

Choosing the right loan type

Making the right loan decision can be tough. Each type comes with its own benefits that you’ll need to carefully consider before settling on a choice. We recommend that you get into writing exactly what your goals are so you can analyze which option best suits your needs. Additionally, you’ll need to compare the rates, terms, and requirements set by each lender, because these factors vary wildly and will make a substantial difference when it comes to your loan.

Whether you go for a home equity loan, a HELOC, or a cash-out refinance, be sure to shop around for the best deal. By using our site, making these comparisons is easier than ever, as we offer curated ratings and reviews of all the top lenders in the industry, all in one place.