how does a home equity loan work?

Answer 1

Essentially, you are using the built up collateral in your home's value to get a loan.

This type of loan is only possible when the home's value exceeds the amount left outstanding on the mortgage to be paid off. Assume, for instance, you "own" a home valued at $200,000 and you put $20,000 down and have paid down the principle on the loan $30,000. This means that you have built $50,000 of equity in that home. You basically own $50,000 worth of it.

A home equity loan will allow you to use that built up "paid off value" aka "equity" as collateral for a loan. A problem with this is that it is a secured debt so if you default on the loan, the bank can take your house to recoup the loss. Another problem is that you just went to having a house 25% paid off to now having it a lesser percentage paid off and you would have 2 loans instead of one.

A home equity loan is an easy way to borrow money but if you have no immediate need for it, you're better off not getting one and perhaps using a credit card with a fixed low interest rate.

Answer 2

Most of these answers paint an accurate picture. An equity line is a 2nd mortgage. Primarily, borrowers get lines up to 100% of their home's value. However, if you're really in a crunch, a few lenders will go to 125% of your home's value. The benefit is, once you pay down the balance, the money becomes available to you again; like a credit card only lenders usually give you a check book. The best place to start is your local bank. They offer the best deals. You can get helocs there at prime minus .5% or even .75%. I work for a broker. I can never match what the bank does in this area. However, you need top notch credit to get a heloc at the bank. If not, a broker is your best bet.

Answer 3

A HELOC is essentially a credit card tied to the equity in your home. It is far better than a "normal" credit card as the interest is tax deductable. You can use it like any normal credit card and most even give you a check book and debit card with the HELOC so you don't have to ask for more money when it is needed. They will generally be around Prime rate +.25- .75% depending on your credit and the combined loan to value or CLTV from your 2 mortgages combined vs. the value of your home. If you are just wanting to consolidate debt or even take cash out though, you are almost always better off just refinancing your mortgage as you will get a lower rate and it can be fixed.

Answer 4

Jimmyjames is correct. Let's say you bought your house for $100,000 and borrowed $90,000 to do it. You have $10,000 equity in your home. Five years later you've paid off a bit of principle, let's just say $1000 to keep it simple, and your home has increased in value with the market. Let's say it's now worth $150,000. You now have $61,000 equity.

A home equity loan is taken against that equity. If you needed $10,000 for a project or large purchase, and you have good credit, a bank would lend you the money, and place a lien on the house if you got behind on payments.

Home equity loans are generally at higher rates than first mortgages, because they are second in line behind the mortgage if you suddenly stopped paying all the bills. Thus their risk is higher.

Answer 5

I generally agree with FlamingoJohn, except keep in mind that a HELOC is insured by the value of your house. Unlike a credit card, which you can put in a bankruptcy, the lein from a HELOC is tied to the property itself. When you sell that property, it must be paid.

Of course, most of us pay off all of our debts and won't ever file for bankrupcty, so it's a moot point. And a HELOC has the added bonus of being (at least partially) tax deductible.