Busting 7 Myths About Home Equity Loans

A home equity loan – also referred to as a second mortgage – allows you to tap into the equity you have built into your home. According to Corelogic.com, homeowners in the US have seen an equity increase of just over 30% since the 2020 third quarter, so home equity loans are becoming quite popular.

If you need some extra cash for any legitimate purpose, such as paying for tuition, renovating your house, or holiday and travel, you should consider taking out a home equity loan. It has a wide range of uses and comes in handy when you need to make a large purchase or payment but don't have enough savings.

However, before taking out a home equity loan, you need to get false assumptions out of the way so you can make a wise decision. Here are the top seven home equity loan myths you need to know about.

Myth: Home Equity Loans and Home Equity Lines of Credit Are the Same

Although they sound almost like the same thing, a home equity loan isn't the same as a HELOC. The main difference between the two is that when you apply for a home equity loan, you get the money as a lump sum, while with a HELOC, you can keep borrowing and repaying a certain amount of money. Another difference is that a home equity loan usually comes with a fixed interest rate, meaning your interest rate never changes over the life of the loan.

In contrast, HELOCs tend to have a variable rate that can go up or down depending on economic conditions. When it comes right down to it, home equity loans work similarly to mortgages, while HELOCs work like a revolving line of credit because the money is not disbursed as a lump sum. A home equity loan is more suitable for you if you need a once-off lump sum to cover a purchase or payment. On the other hand, HELOCs are preferred by homeowners who need the money in stages, so they'll have a pool of funds they can continuously draw from.

Myth: Home Equity Loans Are Unsecured

Home equity loans are different from your regular personal loan. Most personal loans are unsecured, meaning you won't need to use an asset you own as collateral. With home equity loans, you'll need security in the form of equity you have built into your home. By equity, we mean the difference between the fair market value of your home and whatever you still owe on the home. So if you have built up significant equity in your home, you can borrow some of that money back to achieve some of your goals sooner.

Since you have used your home to secure the loan, it means that the lender can seize your property if you default. This is different from an unsecured loan where the lender doesn't have any right to your property if you default. So it's important to stick to your loan payments after taking out a home equity loan because the risk is greater.

Myth: Home Equity Loans Have High-Interest Rates

As mentioned, home equity loans are secured loans, so they tend to have lower interest rates than most other types of loans. That's because, with secured loans, the risk is reduced for the lender. They don't have to worry about getting their money back if you have put your house on the line. If you default, the lender can seize your home to recover their money.

If you want to reduce your monthly payments and make them even more comfortable, you can choose a longer repayment period.
 

Myth: Home Equity Loans Have Limited Use

The name home equity loans might be misleading as it might lead people to believe that this type of loan can only be used for purposes related to your home. For instance, it's a common misconception that a home equity loan only works for home improvements. While a home equity loan can be used for home improvements, it can also be used for various legitimate purposes. You can take out a home equity loan to pay for a wedding or for debt consolidation. Most lenders don't mind what you're spending the money on as long as you're not breaking the law.
 

Myth: Home Equity Loans Have A Big Impact On Credit Score

Credit scores are calculated using various factors. One of the things that can impact your credit score is applying for too many loans in a short time. That's because when you apply for a loan, the lender will run a hard credit check which dings your score lightly. If you're applying for several loans in a short time, then those dings will add up.

So, if you're applying for a home equity loan, it's true that this will have a small impact on your credit score. It's a myth that the impact on your credit score is significant. Moreover, this is something that you can quickly correct by making sure all your monthly payments are made on time. When you stick to your loan payments, a home equity loan can actually improve your credit score in the long run.

Myth: Home Equity Loans Are Not Available to Seasoned Homeowners

It's understandable why people might find this myth believable. After all, it's only possible to take out a home equity loan after you have built equity into your home. It's true that it generally takes time to build equity in your home, but that doesn't mean those who have just purchased their home can't qualify for a home equity loan. If you have made a substantial down payment on your home, that means you can tap into the equity as soon as you take possession of the property. Keep in mind that most lenders also require you to have a good credit score to be eligible.
 

Myth: Home Equity Loans Work Like Car Loans

Car loans are another type of secured loan where your car acts as collateral for the loan. Generally, taking out a home equity loan isn't the same as taking out a car loan because a home equity loan is a bit more time-consuming. This makes sense because your home is usually a bigger asset than your car, so the risk is greater if you're putting your home on the line.

Therefore, the lender will want to do their due diligence and verify all the available information before making a decision. While on the subject, you may also be wondering if you should take out a home equity loan to pay off your car. Generally, this is not a good idea because home equity loans have longer loan times. At the same time, cars tend to depreciate quickly, so it's better to pay your car off as quickly as possible rather than let interest costs accumulate.

There are all sorts of misconceptions about home equity loans, but these are the common ones you need to watch out for. It's essential to debunk these myths because making the wrong decision can end up costing you thousands of dollars. Your home is your biggest investment, and if you're putting it on the line, it's best to do your research as much as possible. Want to know more about home equity loans? Get in touch with Chemung Canal Trust Company today so you can talk to one of our experts.