You may be thinking about taking out a home equity loan in El Paso, TX, to help you afford big expenses, such as major home repairs or renovations. A home equity loan may be appealing because you’ll get the full amount upfront and pay it back with fixed terms and predictable monthly payments.
But it’s important to be aware that to get a home equity loan, the lender will need to determine the amount of equity you’ve built for your home. This calculation uses the market value of your house, which can be subjective, minus how much you owe on the mortgage. If approved, your house comes the collateral for the loan. Collateral is something of value that you own that you pledge to a lender to back a loan. If you don’t pay back your loan, the lender could take your home and sell it to recoup their losses.
Before you apply for a home equity loan, it's helpful to weigh the pros and cons, research alternatives and then choose the option that works best for your financial situation. Keep reading to decide if a home equity loan is the right next step for you.
Think about how much money you need
A home equity loan typically has a fairly high minimum borrowing amount, often $25,000.1 If you have a significant medical expense, are planning a big home renovation or you’re looking to consolidate a large amount of debt at a potentially lower interest rate, then a home equity loan may be the right option.
If you don’t need to borrow that much money, there are other options to consider that may be a better fit:
- Personal loan: A personal loan lets you borrow a lump sum of money, often with a fixed interest rate and predictable monthly payments. Personal loans can be unsecured, meaning they don’t require collateral, or secured, which do require collateral. Secured personal loans often use a vehicle for collateral, but they’re not the same as title loans, which offer smaller borrowing amounts and much shorter repayment timelines.
- Credit card: If you qualify for a 0% introductory or promotional annual percentage rate (APR), you may be able to pay little or no interest on the balance for a set amount of time, which could help you save money. Keep in mind that when the introductory or promotional offer ends, any unpaid balance will then be subject to the account’s higher contract APR.
Consider the risks that come with a home equity loan
With any loan, you take on a certain amount of risk. Since your home serves as the collateral for a home equity loan, you could potentially lose it if you can’t pay back what you owe.
Another downside of a home equity loan is that you may end up with negative equity, also known as being underwater. This may happen if your home value goes down and you end up owing more on the loan than the house is worth. Being underwater could make it difficult to be approved for another loan or sell your home.
A home equity loan may also cause a temporary dip in your credit score when a lender pulls your credit report, called a hard credit inquiry. You should be able to boost your credit score with on-time repayments, which is why it’s so important to have a plan for paying back a loan.
Make a plan to manage the home equity loan
If you decide to move ahead with a home equity loan, there are a few steps you could take to set yourself up for success:
- Don’t borrow more than you need: See how a loan fits into your overall budget. Add up all your existing monthly costs, compare the total amount to your monthly income and decide how much you can afford to make in monthly loan payments, fees and interest before you commit.
- Prequalify with different lenders: Shop around to find the best terms for your financial situation. Just remember, prequalifying doesn’t mean you’re getting a final offer.
- Stay on track with your repayments: Create calendar reminders so that you make your loan payments on time each month. Or, set up automatic payments so you don’t forget.
Carefully weigh your options
As with any loan, you’ll want to weigh the short and long-term pros and cons of borrowing money, especially when your home is the collateral. Think about what you’re looking to use the loan for and whether there might be an alternative option. Consider the risks involved in taking out a secured loan and, if you decide to move forward, plan to manage your loan payments responsibly.
Going through these steps should help you decide whether a home equity loan is right for you and make the best decision for a secure financial future.
