Home Equity Loans

Another type of mortgage that is available is the home equity loan which is a way of taking advantage of a home's equity. Mortgage finance options in a home equity loan include the ability to choose how much your loan will be for, how long your repayment will take and the ability to lock in your fixed interest rate when you choose.

What is home equity?

Home equity is a measure of the difference between the value of your home and how much you owe on the mortgage. Equity can be either positive or negative. If it is negative it means that you owe more on the home than the home is actually worth according to a professional appraisal. Positive equity means that your home's value exceeds - either due to regular payments by you over time, or the home's value going up - the amount that is still owed on the home mortgage.

Home Equity Loan Amounts

Home equity loans are calculated by the lender based upon a formula that they set which is usually around 80% of the available equity in the home. For example, if you have a $100,000 mortgage on a $200,000 home, that means that you have $100,000 of positive equity in the home and the lender may offer you an $80,000 home equity loan that you can use for your own purposes, such as paying off other debts, buying a new car, paying for college remodeling your home, or whatever other need you see fit to spend it on. Some lenders offer up to 100% or even 125% or 150% of the total equity in your home. These loans are high-risk, however in that they may take a very long time to pay back and bring significant or crippling debt into your life. If you wind up defaulting on a home equity loan you could lose your home or have a lien placed against it which will have to be paid before you can ever sell the house.

The 2nd Mortgage

Once you take out a home equity loan, you will receive a second mortgage on the home which will have to be paid on a monthly basis just like your regular mortgage on the home if you have one. This is an important consideration when taking out a home equity loan because you will have to be sure your income is sufficient to meet both your original mortgage as well as the new one in order to avoid the risk of foreclosure.