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What is a home equity loan?

what is a 106 loan

updated 3/22/2012

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 other mortgage on your property. You receive the money from a home equity loan as a lump sum and usually have a fixed interest rate 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.

TIP: Talk to a credit counselor before consolidating your debts with a home equity loan. 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.

Start your search at the National Foundation for Credit Counseling’s website or by calling 800-388-2227. Once you’ve identified counselors near you, check with your local Better Business Bureau or state attorney general’s office to see if any of them has a history of complaints.

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.

Category: Credit

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