Home Equity Loans
A home equity loan may seem similar to a mortgage on the surface, but there is one important difference. While a home equity loan technically falls under the category of a “second mortgage” there is more to it than that. But first, let’s start with the similarities.
A home equity loan is a loan taken out using your property’s value as collateral. It is paid off over a set period of time, usually around fifteen years, and has a fixed interest rate. All of these factors are the same as your basic mortgage.
Where home equity loans differ is in the amount able to be borrowed. Mortgages reflect the value of the property when it was first bought. As such, if your home is worth $100,000 and you made a down payment of $20,000, you would take out a loan for $80,000. But one of the wonderful things about being a home owner is that in many cases, the value of your property will increase. Let’s say you have your home appraised and it is now worth $150,000. If, in the meantime, you have paid off an additional $20,000 of your mortgage, you would have paid a total of $40,000. Since your home has increased in value, you can borrow that additional amount using your home as collateral. In the above example, you can borrow up to $110,000 since $150,000 minus $40,000 equals that amount.
Obviously, it doesn’t make much sense to take out a second mortgage to pay off the first mortgage. Usually, home equity loans are taken out for such items as home improvements, car purchases, sending a child to college, and debt consolidation.
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