Home Equity Loan

A second mortgage on your home.

Generally, a home equity loan is really a second mortgage on your home.  This loan is based on the equity, or value that your home has acquired.  This value or equity is gained through payments on the principal of your first mortgage and how much the value of your home has grown in the local market.

If you purchased a home for $150,000.00 and have paid $50,000.00 on the principal then your equity is $50,000.00. If the home equity loan is based on the actual equity in your home then the loan would be about $50,000.00. Basically you are just refinancing your home  back to the original loan amount. 

When the loan is based on growth in value of your home in the local market, normally the loan will be based on about 125% of the original loan (150,000.00 X 125% = $187,000.00), or a loan of about $37,500.00.  If you are planning to sell your home in the near future the 125% loan can be risky.  If the local market value of your home doesn't grow or it falls then you owe more for the home than it is worth.  Be careful!

Home Equity Loan Rate  

The Home equity loan rate or equity loan rate is the rate of interest that a mortgage company charges home owners annually in return for the equity loan they advance the customer. Since this is a debt against your own property, which you are in actual possession of, loan is a secured debt.  The Annual Percentage Rate (APR) or equity loan rate is determined by the loan amount and its resulting combined loan-to-value ratio and your credit score.  The APR is usually a fixed rate to be paid off in ten or twenty years.

Home Equity Line Of Credit

The home equity line of credit in an alternative if your are acquiring the loan to make repairs or improvements to your home. This is a revolving, variable-rate line of credit which can be used again and again for a fixed amount. This line of credit uses  home as collateral. The APR on this type loan can be greater than an equity loan.

The great thing about this line of credit is that there are no closing costs and it is normally accessible through some form of checking.  As you pay off the loan each month there is more money available within the fixed amount.  

The interest on the home equity loan and the home equity line of credit are normally tax deductible.

Just remember, your home is in most cases your most valuable possession.  It shelters you and your family and you should make sure when you thinking of a home equity loan that you don't jeopardize this valuable possession. Compare loan rates, determine your real needs and make sure you can make the additional loan payments before you make the your decision for an equity loan.