3 Frequently Asked Questions for Home Equity Loans

Home equity loans use the asset base you have built by paying off your mortgage in order to secure financing. Homeowners will receive offers for equity loans almost immediately following a home purchase. However, it is important to answer a few key questions before signing a debt contract.

#1 - Is a Home Equity Loan a Second Mortgage?

Your home equity loan is not a second mortgage. You are not actually placing the deed to your home down as collateral in order to gain the financing. While the loan is technically secured against your property, the subordinate lender never actually gains ownership of your home deed. They are paid once the first lender is paid off, in the case of a default or foreclosure.

#2 - Can a Home Equity Loan Lead to Foreclosure?

Just because you are not handing over the deed to your home for an equity loan does not mean your property is safe in default. Your subordinate lender can buy your home's primary mortgage if you default. The lender can then sell the asset in order to cover the loss from the home equity line if you cannot do so on your own.

#3 - What Should I Use a Home Equity Loan For?

You should use a home equity loan to further build the value of your property. Spending the money on discretionary or luxury items will reduce your financial stability.