BORROW
The Pros and Cons of
HOME EQUITY LOANS
Elizabeth VanCamp
My husband and I recently purchased his grandparents’ house and we’re excited about adding our own touch to this family home. The house has so much nostalgia for my husband, and it has some really awesome features, like a brick fireplace and a deck that spans the entire length of the house. Even with all the great features, we, like many new homeowners, have a list of home improvement projects we’d like to do. While most of the updates and improvements are cosmetic (here’s looking at you, Pepto-Bismol pink bedroom and baby blue bathtub), there are some really big projects that we’d like to take on too, like finishing the basement. Upon looking into the cost of this project—basements cost an average of $40,000—we realized that we wouldn’t be able to afford to do it any time soon without taking out a loan. A home equity loan seemed like a logical choice, but we wanted to truly understand the pros and cons of this kind of loan so we could decide if borrowing against our home would be the right route for paying for a big home project like this.
What is a Home Equity Loan? A home equity loan allows you to borrow equity against the value of your home to pay for things such as home improvement projects, college, or a vacation. Are you confused by what that means? I was too at first. Let me give you an example to make it a little clearer: Let’s say you bought your home for $150,000 and it’s still valued at that amount, and you’ve paid $50,000 on your mortgage, leaving your balance at $100,000. Depending on your financial institution, you can apply for up to 85% of your home’s value. Since your home is still valued at $150,000, 85% would be $127,500. After subtracting what you still owe on the mortgage ($100,000), you would have $27,500 in equity to borrow.
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