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Home Equity Loan – Why Is This Type of Loan Popular?

In plain terms, a home equity loan is one where you secure a loan by using your home as collateral. Equity is defined as the difference between your home's appraised value and your outstanding mortgage balance. If you have equity in your home, borrowing against it might be a very effective way to get some things you need at a good price.

Home equity loans have become popular for good reasons.

The first is the low interest rate and tax deductibility. In 1986, changes in the tax code led to the elimination of deductions for most consumer purchases. Hence home equity loans became the way to buy good and still avail of tax deductions.

Banks consider homes sound collateral, and statistics show, only a small percentage ever defaults on their loans.

For the residence owner his or her home equity is a valuable asset, as they can use this without needing to sell their home. Another reason is because borrowers consider their homes their biggest asset, and wouldn’t dream of defaulting. Banking institutions have realized this and that is why interest rates are lower for this type of loan compared to others.

What’s the profile of a typical home equity loan borrower? According to the consumer Bankers association, the average borrower is 35 to 49 years old, having annual income of $83,998.

Be forewarned though, that defaulting is never a good idea, for you could lose your home. So before, you commit to a home equity loan, educate yourself about this loan and read the fine print......

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