8 Home Equity Loan Myths Debunked

In today’s market, misconceptions regarding home equity loans cause new homeowners to face issues before or after taking on a loan. Home equity is a great asset when you purposely require money. The loan can have relatively low interest rates and comfortable loan terms for large amounts of home equity. They provide flexibility and benefits not obtainable when borrowing money through other means. 

Before getting into the common myths surrounding home equity loans, it is essential to understand what home equity is and how you can borrow money based on the equity in your home.

What Is Home Equity?

Simply put, home equity is the value of your home that is not encumbered by a mortgage. You can calculate it by the market value of your property minus the debt against it. For example, if you purchased a home worth $500,000 and made a 20% down payment of $100,000, you have equity of $100,000 in your home. 

The mortgage for your home will be the remaining $400,000. Your equity will keep increasing as you keep paying off the mortgage. Furthermore, as the value of your home increases over time, your equity will increase.

Types of Home Equity Loans

There are two main home equity loan types: a lump sum payment and a HELOC or home equity line of credit. 

• Lump sum payment: As the name suggests, it is a one-time lump sum you get from a lender based on the equity in your home. You must pay back the loan over time with a pre-determined interest rate. 

   

• HELOC: This is a line of credit based on the equity in your home, which means you can borrow as much or all of the maximum limit. If you borrow some of the total amount, you can make payments and borrow more. 

Following are some myths related to home equity loans.

Common Home Equity Loan Myths

1. Home equity loans and HELOCs are only for significant expenses.

It is a common misconception among new home buyers. You can only use HELOCs for big spending like high-interest debt consolidation, home renovations, or buying new property. 

You can use home equity loans for costs like medical expenses, starting a business, paying for your child’s education, buying a new car, and more. These types of loans offer better flexibility than other lending products. 

2. Applying for HELOCs or home equity loans is complicated.

A common misconception is applying for home equity loans/HELOCs will be complicated and time-consuming as it involves a lot of paperwork. While that may have been true in the past, there is a more streamlined process with the incorporation of online applications and digital document submissions. 

Furthermore, if you meet the requirements of home equity loans and have a good credit score, you can expedite the process. 

3. Home equity loans are unsecured.

Home equity loans are a secured form of borrowing money, as they are issued based on the equity in your home. Unlike credit cards, your home is the asset that secures your loan. The amount of money you can borrow depends on the equity you have built up in your home, which means the more significant the equity, the larger the loan. 

It also means there can be severe consequences for defaulting on payments, such as the lender foreclosing on your home.

4. Home equity loans significantly affect your credit score.

Financial institutions run a credit check each time you apply for a loan, which slightly chips at your credit score. Applying for multiple loans in a short time triggers several credit checks. It will impact your credit score. 

Applying for a home equity loan will also chip at your credit score, but not significantly. However, you can correct it by making payments on time. Furthermore, making all your payments on time can also improve your credit score. 

5. Home equity loans have high-interest rates.

A home equity loan is a secure loan with a lower interest rate when compared to unsecured loans. Secure loans reduce risks for lenders, while your risk increases. If you default on the payments, they still have a way to obtain their money. 

Additionally, you can repay these loans over a longer duration for easier monthly payments. 

6. You must own your home for years to build equity.

Another common myth with home equity loans is you must own your home for years to build up equity. In actuality, the equity in your home increases over time as the value of your home goes up in the market, and you keep repaying the mortgage. You have equity the moment you purchase it.

If you made a down payment on your home, that amount will be your equity in your home. Since equity is on the rise and fall in the market, during an upswing, you can build significant equity in a short amount of time.

5. Pre-approval is a guarantee.

Pre-approval is an initial estimate of the home equity loan amount, the key being “estimate.” Your lender can still renegotiate or even back out of the deal after a deeper analysis. Pre-approval for a home equity loan is not guaranteed, and you should not treat it as one. 

6. Home equity loans and HELOCs are only for those struggling.

While home equity loans and HELOCs are helpful for those in a financial bind, they can be issued to people with all kinds of backgrounds. Homeowners who are well off and want to invest in new property, make home improvements, or fund education can also opt for HELOCs or home equity loans.

The Bottom Line

With these common myths around home equity loans and HELOCs debunked, you, as a homeowner, can make an informed decision about the money you wish to borrow. Remember, your home and the equity in your home is an asset and can be used to borrow large amounts of money to impact your life. However, defaulting on your payments can have severe consequences, so do your research and be responsible. 

For more information about home equity loans or to start your loan application, call Canadalend at 1-844-586-0713 or contact us here.