Home equity loans are a type of loan available to home owners who have partially or entirely paid for their homes. Such loans work by letting the owner borrow from home equity, meaning the value of his or her residence which has not already been borrowed in the form of a mortgage. More home equity becomes available as the mortgage is paid off and/or the property increases in value.

Taking out a home equity loan can make available a substantial amount of money, which can make it possible to afford unexpected expenses, make investments, pay for improvements to the property which would increase its value, or use for any other purpose. Most banks offer loans of this type for a five to fifteen year repayment period, and many will provide them either as a traditional loan or a line of credit. The percentage of total equity they will allow to be borrowed also varies; this often ranges from about eighty to ninety percent at different banks.

Such loans generally offer lower interest rates and greater borrowing limits than credit cards and some other types of loans. According to ftc.gov, potential borrowers should compare multiple lenders’ interest rates, fees, years to repay, and other loan characteristics. What lenders are willing to offer may vary depending upon the borrower’s credit record. The FTC also warns of several dishonest loan schemes homeowners should be careful to avoid, and indicates that borrowers are usually entitled to cancel a home equity loan within three days after signing up for it, without being penalized.

There are some disadvantages to taking out home equity loans. In addition to having to repay the loan with interest, a number of fees may apply to initiating such a loan. According to wikipedia.org, some of them include closing fees, appraisal fees (so the lender can determine how much equity you have), or early repayment fees (some lenders require a fee to be paid if the loans are paid off early). If the property is sold before they are repaid, the cost of repaying both the mortgage and the home equity loan could leave little money remaining for the purchase of another residence.

Overall, home equity loans offer a method of providing collateral to borrow large amounts of money at relatively low interest rates, but the terms of such loans and their implications should be carefully considered beforehand.