How It Works
Find out more about home equity mortgage loans and how they work before you apply. Here is everything a borrower should know about the loans.
About Home Equity
Home equity refers to the amount by which the appraised value of your home exceeds the debts you have against your home. For example, if you have a house that's worth $200,000 and you owe $170,000 on your mortgage, you have equity of $30,000. Home equity represents an asset that can be used as collateral, which is why lenders are willing to lend money to people with home equity. Remember that home equity mortgage loans are secured debts, which means two things. First, your interest rates will be considerably lower than with unsecured debt because there is less risk involved for the lender. Secondly, if you default on the loan, you could lose your home. When you take out a home equity loan, you put your home up as collateral and failing to make payments as agreed could give the lender the right to seize your home.
Types of Home Equity Loans
There are two primary types of home equity borrowing: home equity mortgage loans and home equity lines of credit (HELOCs). A regular home equity loan is for borrowers who want consistent payments with no surprises. A conventional home equity mortgage loan gives you one lump-sum payment that you then pay back with fixed monthly payments over a term of 10, 15, or 30 years. Unless you are late on a payment, your interest rate and the loan's maturity date will never change. A home equity line of credit (HELOC), on the other hand, works more like a credit card. A HELOC is a revolving debt with a certain credit limit for which you are approved when you apply. After you repay it, you can borrow the money again, just like with a credit card. Monthly payments will fluctuate because the interest rate is variable. Early in the loan, you may be able to make interest-only payments. HELOCs are ideal for large, recurring expenses that you can't estimate exactly, such as a home repair project.
What a Home Equity Loan Can Do for You
You can use home equity mortgage loans in any number of ways. Here are some of the most popular uses:
- Consolidate credit card debt
- Finance a child's college education
- Cover the costs of home renovations
- Take advantage of the ultra-low interest rates to buy a new car
- Upgrade your home to build even more equity
- Pay for large and urgent life expenses, such as costly medical bills
- Get a loan that allows you to deduct the interest from your income taxes
If you are unsure of some of the terms used so far, we have provided some lending lingo and their definitions you can learn and use for your future business with home equity mortgage loans.
