Home Equity Loans Explanation

Posted on | August 6, 2009 | No Comments

Home Equity loans or lines of credit are also referred to as second mortgages. Home Equity is the amount of ownership that has been built up in a property.

This equity is equal to the current market value of the home minus the outstanding mortgage balance. This is what a home equity loan borrows against. Although that equity cannot be sold, banks will lend money against it.

Mortgagers often have a sizable amount of equity in their home; this equity can be used as collateral to obtain a large amount of credit for whatever purpose. Interest rates on home equity loans are fairly reasonable, although they are a bit higher than first mortgages.

Home equity loans offer significant tax savings due to the fact that the interest paid on a home equity loan is tax-deductible. In many instances, the interest on a home equity loan of up to $100,000 can be fully tax-deductible up to 100% of your home’s value.

Home equity loans are often used to consolidate other debt with high interest rates (like credit card debt), to finance large expenses (such as college or a wedding), or to purchase other costly items. This should only be done if the benefits of taking out the home equity loan (interest savings) outweigh the costs (fees, risk).
There are two main types of home equity loans:

1. The first type is the traditional home equity loan, also known as the second mortgage, which lends out a lump sum of money that must be repaid over a fixed period.
2. The second type is the home equity line of credit, which provides the borrower with a checkbook or a credit card that is used to borrow funds against the home equity. Funds borrowed from a traditional home equity loan start accruing interest immediately after the lump sum is disbursed; funds borrowed from a home equity line of credit do not begin accruing interest until a purchase is made against your equity.

You may have the option to obtain a lower interest rate by paying discount points. One point represents one percent of the  home equity loan amount.

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