Home Equity Loan

Home Equity loan – What is it


Loans, loans, loans everybody is looking for a way to get extra money and loans are one way to get it. A home equity loan is a loan for those who currently have a home; sorry renters this one isn’t for you. If you own your own home and have equity in it, then this may be an option for you.

Today, many homeowners are upside down in regards to their mortgages. This means that the total amount of their mortgage is more than what the home is worth. This is an unfortunate situation for these homeowners. However, if you are lucky enough to be in the opposite position and need some extra money you may want to consider this type of loan.

A home equity loan is basically taking a loan out on your house but only on the amount which is the difference between the total balance of your mortgage and what your home is valued at. For example, your mortgage balance is $100,000 and your home has been valued at $125,000 then you could get an equity loan for a maximum of $25,000.

The process of getting this type of loan is basically the same as getting a traditional loan. If you are approved, the money that you receive can be used for whatever you want. It could be to remodel, for college expenses or to pay off your bills.

Lower Your Payment & Save On Interest

So what happens to your home when you have a home equity loan? Well, nothing as long as you are make the monthly payments on the loan. If you fault on the loan, then the lender has a right to part of your home because a lien has been placed on your home.

What does this mean? It means that if you don’t make the payments, when you sell your home, part of the gain on the sale that you make, that money must go to pay of the equity loan. This is can be disheartening to the homeowner especially if they do not completely understand how it works. Let’s look at an example of how an equity home loan would be paid:

  • You sell your home for $150,000
  • Your mortgage balance is $100,000
  • Your equity loan balance is $10,000
  • Fees total $5,000

In this example, the mortgage balance, the equity loan balance and the fees are subtracted from your home’s selling price. You may have thought that you would be receiving $45,000 but actually you only receive $35,000 ($150,000 – $100,000 – $10,000 -$5,000). The ten thousand may not seem like a lot but when you were counting on receiving more it is.

A home equity loan can be obtained from a number of sources such as your personal bank, credit union or any other business that offers home loans. Your credit card company may even offer these types of loans. Before cashing out on your home, you need to seriously consider if you want this type of loan.