Getting a home equity loan can be considered as taking another mortgage against your home. The lender, usually a bank, provides the borrower with a lump sum that is equivalent to your home’s equity.
If the borrower fails to pay their home equity loan, the lender can foreclose the house. Private lenders usually allow borrowers to loan around 80% to 85% of their home’s value. Home equity loans have a fixed repayment plan, interest rates and monthly payments.
Borrowers decide how they use the money received from their home equity loan. However, it has its drawbacks. Home equity loans are a potential debt trap and it also reduces the house’s equity. Thus, it’s essential to understand how home equity loans work so you can decide if it’s the best option for your financial needs.