A home equity loan is simply a loan in which your home serves as collateral. It is sometimes used interchangeably with a home equity line of credit (HELOC), but the two are very different instruments. A home equity loan provides you money in a lump some payment, with an established interest rate and payback deadline. HELOC allows you to withdraw funds as you desire. Each home equity plan has its advantages and disadvantages.

Home Equity Loan Advantages

By getting your money in a single payment, you avoid the transaction fees that accompany every withdrawal of money on a HELOC. In addition, you can borrow just what you need. With HELOC transactions, there are minimum amounts you must withdraw, even if you need less than that minimum at the time.

Home Equity Loan Approval Process

Getting a home equity loan is like getting any other loan, in that your ability to pay back the loan is evaluated by the lender, who will determine the maximum amount you can borrow and the terms under which it must be repaid. Because you are already in a home and making mortgage payments, you may be more likely to qualify for a home equity loan than other traditional loans, even if you have poor or average credit.

When deciding between a home equity loan and a HELOC, make sure you shop around and understand all the costs involved and how the payments will be determined. A HELOC that uses a variable interest rate could see a significant change in your payment terms.

Remember also that a home equity loan usually requires you to repay the loan in identical monthly installments. You’ll also be responsible for any of several loan fees that could include: appraisal fees, originator fees, title fees, stamp duties, arrangement fees, closing fees, early pay-off fee.

Home Equity Loan Uses

A home equity loan can be used for any purpose, whether it’s for a home improvement project or addition, or to pay college or medical expenses. Some people even take that lump some loan and just invest it, perhaps as a down payment on another property.

You may also want to use a home equity loan to pay off outstanding credit card debts or other loans so that your debts are more consolidated and you have a fixed date for when your loan will be repaid. If you do use a home equity loan to pay off credit cards, just be sure not to run up those cards again.

Home Equity Loan Risks

Borrowing money, whether in the form of a loan or with a credit card, always carries a certain risk. Take a good look at your income and expenses and see if another monthly expense is feasible.

Failure to pay off your home equity loan could put your home at jeopardy, just as failing to pay your mortgage could put you in default and foreclosure.

When applying for a home equity loan, you also run the risk of working with a predatory lender who is looking to take advantage of homeowners. To protect yourself, never sign anything without reading it carefully, and never sign papers with sections left blank to be filled in later or papers about which you have questions. If the terms of the loan don’t seem fair or right to you, trust your instinct and walk away.

Another sad, but all-too-common scam is operated by contractors who propose doing work on your house and setting up a loan with a lender he has worked with before. You may be rushed in to signing papers you haven’t read with high interest rates.

For other home equity loan scams, check out this helpful page at the Federal Trade Commission Website.