Home Equity Loans

Home Equity Loans are a fixed rate loan or second mortgage on a home. With home equity loans, a predetermined amount of money is borrowed, and payments are made over the term of the loan.  For example, the loan could be for $50,000 over 15 years.  This restricted use of a home equity loan makes it less flexible than a home equity line of credit.

The amount of equity in a home is determined by taking the current market value of the home and subtracting all of the outstanding loans that are using the home as collateral.  If a home is worth $300,000, and the remaining principal on a loan is $100,000, then the equity in the home is $200,000.

The lending institution will usually allow the borrower to take out a loan of up to 80% of the equity in a home. In this example, the borrower could get a loan as large as $200,000 x 80% or $160,000, if their annual income qualifies them for a home equity loan of that amount.

One advantage of a home equity loan is the interest portion of the payment is usually tax deductible.  Keep in mind, however, that a home equity loan is a secured loan using your home as collateral.  If loan payments are not made, foreclosure is possible.