A home equity loan has many different names such as equity mortgages, equity loans, or a second mortgage. A home equity loan allows the owner of the loan to borrow against the principle of the loan. For example, if the owner of the loan wants to start a business or has an unexpected emergency, the owner of the loan can borrow against the equity of their home. The amount the owner can borrow will be contingent, at least in part, on how much equity they have built into the home and where the current value of the home market is at the time.
Home equity can easily be described as the difference between fair market value of the home and what is currently owed on the mortgage. For example, if your home is estimated at $500,000 and you owe $325,000 on your home loan, you have $175,000 in equity that you can borrow from. For the most part, the owner of the loan can borrow up to 85% of their home equity loan.
When the person who owns the loan decides they want to borrow against the principle of the loan, they can borrow up to 85% of it. Typically this is the difference between an equity loan and a home equity line of credit (HELOC). Not to be confused with HELOCs that work as a line of credit, a credit card, or a cash-out-refinance, a home equity loan is loan taken out from the equity of your home. In most cases, you must pay off your home equity loan within 15 years. For the most part, equity home loans have fixed interest rates whereas HELOCs usually have adjustable rates. You can use your home equity mortgage to pay for medical bills, education, home improvements, remodeling, or anything else you like. Interest you pay on a home equity mortgage is tax deductible as well.
Home equity loans can be great if used properly. For example, one can start a business, make upgrades to their house, pay for college, or use it for any emergency. However, these equity loans need to be used responsibly, otherwise if they are not paid back, it will cause a default on the loan and will eventually result in foreclosure on the home.
There are many advantages to choosing an equity loan including:
If the owner of the loan needs a significant amount of money, whether it be to buy a car, upgrade a home, recover from an emergency, or starting a new business venture, this option will be the best for you. Interest rates are usually very low which makes these loans popular among borrowers who want to consolidate debt.