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.