home equity loans

A home equity loan is a type of loan where the borrower’s equity in his home is used as collateral. These equity loans are useful in financing one-time major projects such as major home repairs, medical bills, and education. Equity? Collateral? It seems a lot of gibberish, right? How does a home equity loan work, exactly?

Home equity is the difference between the market or appraised value of a house, and the amount of money the owner still owes the bank or a creditor for its mortgage, if there is any. Say you bought a house 3 years ago for $300,000 and have already paid off your creditor bank $10,000 in principal. If your property can be sold now at $400,000, that is the market or appraised value of your property. The difference between the market value and the loan balance is your home equity.

In this case, this is equivalent to $110,000 ($400,000 market value less $290,000 balance of your bank loan). Home equity loan works based on the value of your home equity. Banks or creditors would not usually lend money without security. They have to be able to hold on to something of similar worth just in case you default in paying your mortgage. This is collateral and in a home equity loan, it is your house that will be used to secure your loan. This means that if you fail to pay your debt, the bank will have the right to take over your house and force you to move out.

Home equity loan allows you to turn your home equity into cash and use it to fund major expenses. It works like a second mortgage which means that it is secured against the value of your property. However, it will be secondary to any prior and existing loans or mortgages against the property. The term of a home equity loan (at most 15 years) is usually shorter than a first mortgage, which could be up to 30 years. The amount you can borrow is affected by the appraised value of your property, credit rating and history, monthly or annual income, and state laws. While it is possible to get beyond 100% of the property’s appraised value, certain states set limits on the amount of your home equity loan.

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