Are Home Equity Loans Affordable?

There are a few ways to reach your goal when it comes to paying for big-ticket items like home repairs, education, or investment or vacation properties. If you’re a homeowner, the equity in your home may be the golden ticket to achieving your goals. But with a home equity loan come costs in the form of origination fees, appraisals, and interest. Are home equity loans affordable?

What Is a Home Equity Loan?

Simply put, a home equity loan is a lump sum loan using your primary residence as collateral. As you make mortgage payments on your house, you build equity. If the value of your home goes up due to market trends, your equity also increases.

A home equity loan is a very flexible tool—repayment terms range from 5 to 30 years with fixed interest rates and payments. And since the loan is paid in a lump sum, you can use it for whatever you wish, including home renovations, paying down higher-interest debt, or funding an education.

But a home equity loan isn’t without its costs. Since a home equity loan is a second mortgage, the fees and application process are very similar. Fees will vary by lender but typically include appraisal fees to quantify the amount of equity you have, as well as origination fees that could consist of recording fees, document fees, and so on.

Home equity loans also accrue interest. Home equity loan rates are typically a bit higher than traditional mortgage interest rates. This is to protect the lender in the event of a default. If you fail to make payments on your home equity loan or your primary mortgage, your home could be taken and sold by the lender to recoup its costs. In this situation, the primary mortgage is paid first, with the excess proceeds going to the home equity loan.

Are Home Equity Loans Affordable?

Affordability is a highly subjective term. Home equity loans are unequivocally affordable compared to other forms of funding for large amounts, such as cash advances from a credit card or payday loans. Since their interest rates are fixed for the life of the loan, it should be simple to judge whether your payments are manageable on your current budget.

When it comes to similar products, a home equity line of credit (HELOC) is the closest option. Compared to a HELOC, which also uses the equity in your home as collateral, a home equity loan has the potential to be more affordable. Typically, HELOCs have adjustable interest rates. While that can be a benefit when rates are down, when they go up, borrowers may find that the revolving line of credit is more expensive than a home equity loan.

The Bottom Line

Home equity loans are flexible tools for homeowners to borrow significant amounts of money. With rates typically a bit higher than mortgage rates but significantly lower than credit cards, they offer affordable access to cash. While mortgage rates are rising, they are still low enough to make a home equity loan attractive to the average homeowner.