When a homeowner is planning for a major home repair or renovation, he has an option to apply for a home equity loan to finance the expenses of a repair. Homeowners who are considering a home equity loan should learn the basics of this type of loan so as to know if this is something that they can benefit from and, of course, afford to pay.

Mortgage vs. Home Equity Loan

If one would look closely, home equity loan resembles mortgage in that the home is used as a security for the loan. However, the similarities end there. Home equity loan or home equity line of credit (more known as HELOC) is more flexible than a mortgage in terms of the amount to borrow and the payment terms.

A home must not have an existing lien (or an existing mortgage) in order to qualify for a mortgage application. With home equity loan, a homeowner can apply for one with or without an existing home loan. Although home equity loan sounds like a second mortgage, it is not. It differs from second mortgage in terms of payment terms. A second mortgage has a fixed payment scheme and interest rates while a home equity loan has a flexible one.

What's more, a homeowner can use home equity loan to borrow small amount of money, say to finance a minor kitchen improvement. He can borrow small or big and pay short or long, just like a credit card.

Home Equity Loan vs. Credit Cards

If home equity loan works like a credit card, why should a homeowner bother to know about home equity loans when he could anytime use a credit card to finance minor or major home repairs?

Although a home equity loan and a credit card have lots of similarities, the former has more advantages as compared to the latter. A home equity loan is friendlier to homeowners. The interest rates are much lower and a borrower can apply for tax incentives and interest deductions under the federal law. Credit card owners don't enjoy these types of incentives and deductions.

Is it for you?

It is true that a home equity loan has many advantages. Aside from that, it is very easy to apply for and get approved of. However, this type of loan is not for everyone. A borrower who has the compulsion to purchase until the credit limit is met is not the ideal candidate for a HELOC.

Remember that the equity for this type of loan is a home. If a compulsive borrower and spender failed to pay within the specified payment date and even after extending his payment terms, his home would be foreclosed.

This type of loan is best for people who has an immediate need for money -- whether it would be used for a home renovation or to pay for tuition -- and is expecting money within the payment period.

If used wisely, a homeowner would benefit greatly with a home equity loan.