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Cash-strapped? Is a Home Equity Loan the Answer for You?

If you’re looking for a solution to cover a major expense or consolidate debt, you may want to consider a home equity loan, which allows you to borrow against the equity in your property.

Over the years, you’ve likely invested thousands of dollars in mortgage payments toward your home. That investment might be able to help you secure a home equity loan.

Before you consider how to get a home equity loan, you need to wrap your head around what a home equity loan is, and how home equity loans work. By definition a home equity loan allows borrowers to secure a lump sum loan by using their home as collateral. Borrowers pay back the loan by making monthly payments with a fixed interest rate. Generally, home equity loans are used to help borrowers consolidate debt or cover a major expense, such as a home renovation.

How can I spend a home equity loan?

With low interest rates and fixed monthly payments, home equity loans are an appealing option for a range of scenarios. If, for example, you’ve accumulated high-interest debt, a home equity loan could be a good solution to help consolidate debt and decrease interest rates. Similarly, if you need to pay for major home improvements, such as a remodel or new roof, a home loan might be the right choice.

Home equity loans provide cash for large one-time investments, as you receive the entire amount at once. Homeowners who use home equity loans to consolidate debt can save thousands of dollars in interest charges over the loan’s term. They can then focus on one simple monthly payment that’s lower than what they paid for their previous debts.

How much money can I borrow with a home equity loan?

The amount of equity in your property determines the minimum and maximum amount of a home equity loan. For instance, if the appraised value of your home equals $300,000 and you owe $50,000 on the mortgage, your home equity would total $250,000.

Homeowners thinking about taking out a home equity loan should consider spending the lump sum in investments that will yield a positive return, such as home improvements, education, debt consolidation and coverage for unexpected financial events, such as a medical emergency.

Top three benefits of a home equity loan:

  1. Borrowers receive fixed rates with predictable monthly payments over a fixed term and receive the distribution in a lump sum.
  2. Interest rates will be lower than with a personal loan or credit card and offer flexible term options.
  3. A home equity loan does not change your current mortgage rate, and interest may qualify as a tax deduction. Consult your tax advisor to learn more about tax-deductible interest.

Three considerations before applying for a home equity loan:

  1. Because you use your home as collateral, foreclosure is possible if you fail to make the monthly loan payments.
  2. Getting one means taking on another payment each month if you’re not using the lump sum to consolidate other outstanding debt.
  3. It’s important to consider your spending habits and any questionable financial decisions that may have contributed to debt accumulation in the first place, so you can avoid making the same budgetary mistakes in the future.

A First Merchants lending advisor can help you understand how to get a home equity loan and answer any of your questions. Call us at 1.800.205.3464 or visit a banking center to speak with a First Merchants home equity expert today.