Own a Home? Here's Why You Still Might Want a Personal Loan Over a Home Equity Loan - The Motley Fool

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by Maurie Backman | Published on Aug. 8, 2022
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It doesn't always pay to tap your home equity.
Check out The Ascent's best personal loans for 2022
There may come a point when you need to borrow some money, whether to tackle expensive medical bills, renovate your home, or start a business. If you own a home, you may have the option to borrow against the equity you have in it.
Equity refers to the portion of your home you own outright. If you have a property with a market value of $500,000 but owe $350,000 on your mortgage, that leaves you with $150,000 in equity.
You can explore several options for borrowing against your home equity, and a common one is a home equity loan. The upside of going this route is getting to lock in a fixed interest rate on the sum you borrow. (HELOCs, another popular borrowing option for homeowners, come with variable interest rates, making them trickier to pay off.)
Plus, home equity loans tend to charge competitive interest rates. And qualifying for one can be fairly easy if the equity in your home is there.
But even if you can qualify for a home equity loan, you may want to take out a personal loan instead. Here's why.
Home equity loans are a type of secured debt. That means they're tied to a specific asset — your home.
In some ways, that's a good thing. Because your home is used as collateral for a home equity loan, you may find that it's easy to qualify for one even if your credit score isn't great.
But there's a danger in borrowing against your home. If you fall behind on your home equity loan payments to an extreme degree, you could end up losing your home. That's because your lender could force the sale of your home in order to get repaid, the same way a mortgage lender could go the same route if need be.
With a personal loan, that won't happen. Personal loans are unsecured, so they're not tied to a specific asset. Qualifying for a personal loan generally hinges on having good credit, because your lender can't fall back on an asset it can sell or repossess to be made whole. But if you have strong credit, then you may find that a personal loan allows you to borrow money affordably without having to put what could be your most important asset on the line.
Let's be clear about one thing. Falling behind on a personal loan could have serious consequences, including severe damage to your credit score. But with a home equity loan, you risk losing the roof over your head if things go wrong. And that's something you may not feel comfortable with.
You might end up with a more competitive interest rate on a home equity loan than on a personal loan. But if it helps you sleep better at night, then it may be worth seeing how personal loans work and if one is right for you — even if the option to tap your home equity exists.
Our team of independent experts pored over the fine print to find the select personal loans that offer competitive rates and low fees. Get started by reviewing The Ascent's best personal loans for 2022.
Maurie Backman writes about current events affecting small businesses for The Ascent and The Motley Fool.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
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