What Is A Home Equity Loan?

You might have heard a lot about the home equity loan from friends or co-workers, but still you are not sure what it is and how it works. But really, what is a home equity loan? To understand what it is and how it works, first we need to know what home equity is. To be able for you to have home equity, of course, you should have or own a home. Your home can be your best asset and no matter how much money you are making at present, the time will come when you need a considerable amount of money - not just a little extra - but a large amount of money. And don’t say that that’s not going to happen, because we don’t know what the future has in store for us.

Home equity is the difference between the current market value (appraised value) of your home and the outstanding mortgage balance. Therefore, if -

Your home’s appraised value is $ 100, 000
Your outstanding mortgage balance is $ 50, 000
Your home equity is $ 50,000

Now that you know what home equity is, it’s time for you to ask “what is a home equity loan?” A home equity loan has two major types; the home equity loan and home equity line of credit. A home equity loan or a home equity line of credit allows you to borrow money using your home’s equity as collateral. Both types actually put your home in the hands of the lenders. If you are not able to pay your dues, this could mean the loss of your home. So, be very careful in dealing with this kind of loan.

To compute for your potential credit, most lenders set a percentage of your home’s appraised value minus the balance owed on mortgage. The exact amount in which you can borrow also depends on some factors like your ability to pay, debts, and other financial obligation. Given the above example:

Your home’s appraised value $ 100, 000
Percentage x 80 %
Percentage of appraised value = $ 80, 000
Less balance owed on mortgage - $ 50, 000
Your potential credit is $ 30, 000

Now that you know what home equity and a home equity loan are, the next thing you should be asking is, which home equity loan is best for you? To find which home equity loan is best for you, determine the purpose of your loan and how long you want to pay it, in terms of years. In order for you not to get hooked-up on debt for a long time, borrow only the amount you need for a specific purpose only.