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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 loans 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. So 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 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 that large.
One advantage of a home equity loan is that 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.
Other forms of this term include - home equity loan |
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