Home equity is the difference between the property value and what you owe on your mortgage. For example, if your property value is $2,50,000 and your mortgage balance is $1,50,000, then it means that you've a equity of $1,00,000 in your property. As you pay off the mortgage every month, your home equity will get increased.
Why is home equity tapped?
Home equity loans as well as home equity lines of credit have been used by the borrowers to fund property improvements. Such improvements include remodels and additions. A large number of people also tap their home equity in order to pay off their bills or consolidate their unsecured debts.
How can tapping equity affect the borrower?
Most of us find it very appealing to tap the equity in our homes to pay off other debts. Such loans are available at a lower interest rate compared to a credit card. Moreover, unlike credit cards, home equity loans are tax deductible. However, tapping home equity loans may have a negative impact on the borrower. It won't help you in eliminating your debt. Rather, you're jeopardizing your home for paying off the unsecured debts. Unlike credit card debts, a home equity loan will put your house at risk as it is a secured loan.
Thus, you should only go for a home equity loan to pay off your unsecured debts when you're sure that you'll be able to pay off your equity loan. If you're unable to do so, your property will be foreclosed which will have greater negative impact on your credit report compared to credit card debts.