Using the Equity on Your Home for a Loan

Home equity is the amount of money available to a homeowner by taking the value of the home minus the amount owed on the mortgage(s). A home equity loan allows the homeowner to access funds using their house as collateral. It is also called a second mortgage because it a loan secured by property. For example, you own a home that is worth $200,000 and the mortgage left on the house is $150,000. In this case you have $50,000 of home equity. This is an easy way to receive money, but remember your home will be used at collateral. If the loan is not paid back, you can lose your home.

There are two types of equity loans, a home equity loan and a home equity line of credit (also referred to as a HELOC). The features of a home equity loan are that it is a one time, lump sum payment. It has a fixed interest rate and the same payment amount every month.

A home equity line of credit works much like a credit card, with a revolving balance. The credit line is decided by the amount of equity the home has. The homeowner borrows money, pays back the principal, then borrows again, pays back and so forth. This type of loan has a variable interest rate.

Home equity loans and lines of credit can benefit homeowners by allowing fast access to cash. This money can be used for virtually anything, but like any other loan, must be used responsibly.