The significance of home equity loans

I've talked before about the importance of owning property. Whether you live in the place you own, or you're renting it out, it's nice to have your monthly rent payment going towards something rather than "down the drain."

Aside from that psychological boost, there is a financial advantage to owning your own home. Obviously, you're increasing your net worth, but you are also eligible for a home equity loan.


Essentially, you're borrowing money against the value of your house. A home equity loan is generally used to pay off big purchases, like medical expenses, a college education, or a super nice car (?).

The interest rate is generally fair, at a little over prime. You must have a good credit rating, and the cash is delivered in a lump sum payment (very nice).

Alternatively, you can get a Home Equity Line of Credit (HELOC). This is similar to the home equity loan, in that  you are also borrowing money against your house. However, rather than receiving a lump sum payment, the borrower is given a line of credit within which to work: it's pretty much like having a large credit card.

Abusing the Home Equity Line of Credit is often faulted as one of the reasons for the subprime mortgage crisis: essentially, people were exploiting this generous line of credit in order to buy less-than-important items, such as boats, cars, and prostitutes.

After the mortgage crisis in the United States, many American banks froze HELOC lending, as so many homes had been suddenly reduced in value. Banks like Chase are now facing lawsuits over this freeze.

To sum up, owning a home can be a lifesaver when you have to pay off medical bills or college tuition. It's nice to have the security of a large amount of collateral under your feet whenever the situation arises.

71 comments:

Every Day said...
March 25, 2011 at 10:56 AM

I wish I can afford a house. :|

Mike said...
March 25, 2011 at 11:36 AM

Really interesting post , now just need to find the initial capital for that house ;)

123 said...
March 25, 2011 at 2:07 PM

I have a feeling if I ever owned my own house it would end up being burned down in a drunken rampage of confusion

Eric P said...
March 25, 2011 at 3:36 PM

Don't think I'll be able to afford a house, and by extention get a home equity line of credit, for quite a while. I won't hold my breath.

Jay said...
March 25, 2011 at 4:57 PM

never thought of a home as an asset against other loans. :D

ed said...
March 25, 2011 at 6:57 PM

owning a home sounds way better than renting an apartment

Aaron M. Gipson said...
March 25, 2011 at 7:14 PM

I bought a house down here pretty easily, but the credit standards are alot more lax (non existent). I don't think I could ever qualify for a loan in the States right now the way the economy is.

TheHarvester said...
March 26, 2011 at 6:12 AM

as usual shelby, amazing stuff. love to have some insight on equity and the loans now

HiFi said...
March 26, 2011 at 6:27 AM

Good write up. Very insightful.

duffboi said...
March 26, 2011 at 7:31 AM

I'll keep this in mind, for if I ever own a house again.

Rachel Neilson said...
March 26, 2011 at 9:12 AM

After I read this I went to go buy a house, and since my buddy works at the Target I got it for hella cheap.

Zombie said...
March 26, 2011 at 12:44 PM

Cant wait to get my own place! :D

schultzz said...
March 26, 2011 at 1:23 PM

this is why i hate loans.

Geojour said...
March 26, 2011 at 5:12 PM

I am in the midst of trying to figure out what to do - buy a home or just rent until I get my degree and move? Knowing information like this will definitely help!

Anonymous said...
March 27, 2011 at 4:34 AM

Sounds like an excellent strategy. All the more incentive for moving out of my parents' place!

Killtrip said...
March 27, 2011 at 10:16 AM

Just bought a house 3 years ago.. that gives me plenty of time to read up on this stuff before I buy my next house :D

G said...
March 27, 2011 at 2:45 PM

Best thing I ever did was buy a house straight out of uni...it was just before the market went skyward and has enabled me to continually move up the chain over the years.

ebm93 said...
March 27, 2011 at 7:23 PM

I have to start saving money t.t lol

Spike said...
March 28, 2011 at 2:32 AM

very informative. thanks

Patti D. said...
March 28, 2011 at 8:05 AM

great info, too bad sometimes you don't own the house, but the bank does.

Max Downton said...
March 30, 2011 at 4:12 AM

That's the aim - owning property... In London, Paris, New York. We can dream right?

Skimbosh said...
March 31, 2011 at 6:49 AM

Damn right Chase is facing lawsuits. That's all I have to say at this time.

I can't emphasize your mentioning of having a good credit rating for this, so readers make sure you keep your score up!

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