Define Home Equity Loan

A good way to define home equity loans is to start with an understanding of home equity basics. Many factors can play a role in a home equity loan including the amount of equity in a home and the value of the home in the current housing market.

Learn the pros and cons of a home equity loan.

In order to define home equity loans you need to start with the basics – what is "equity?" Equity in a home is simply the market value of the home minus the total amount owed on the home. As an example, if you purchase a home for $200,000 and make a down payment of $20,000, you would owe $180,000 on the mortgage. Your equity would be $20,000, the $200,000 value of the home minus the $180,000 owed.

The equity in your home is constantly changing based on your declining mortgage balance as you make mortgage payments as well as the fluctuations in your local housing market. For example:

• Your equity can increase:
  • With mortgage payments – Your equity increases as you continue to pay off your mortgage loan.
  • With an increase in your home's value – If market values of similar homes in the area increase, your home's value may also increase.
• Your equity can decrease:
  • Decreasing home value - If the values of similar homes in the area start to decline, your home's value may also decline.
  • Using equity as collateral – If you use part of your equity as collateral for a loan, the amount of that loan is reduced from your equity until you repay the loan.

Lenders created the home equity loan as a way for homeowners to use their home equity as collateral for a loan. The amount of the equity available to be loaned usually increases the longer the homeowner pays on the mortgage. For example:

• The amount of available home equity may be small if the homeowner recently purchased their home and the other homes in the area have not dramatically increased in value.
• Homeowners who have completely paid off their mortgage have built up a sizable equity in their home. They may be able to qualify for a home equity loan for as much 85 percent of the appraised value of their home.

Home equity loans, also called "second" mortgages, are available in two forms:

• Home equity loans – Installment loans where a specific amount of money is borrowed and the borrower agrees to repay the loan over a fixed number of payments.
• Home equity lines of credit - Revolving lines of credit where the borrower is approved to borrow up to a certain amount of money. As the homeowner borrows and then repays what was borrowed, the amount repaid becomes available again to be borrowed.

The homeowner applies for a home equity loan for a specific amount of money. The lender will:

• Review the application
• Have the home appraised
• Research how much equity the homeowner has in the home
• Evaluate the homeowner's ability to repay the loan

Once the loan is approved, the homeowner receives the total amount of the home equity loan in a check or the amount is deposited into their account.

The application process for the home equity line of credit is the same as for a home equity loan. When the loan is approved, the homeowner is given a checkbook from which they can write checks to draw on the line of credit, or in some instances the lender issues a debit card that draws directly from the line of credit.

It is important to remember that when you take out a home equity loan you are putting your home at risk. If you don't repay the loan you run the risk of losing your home to the lender.

Be sure to do your homework before you apply for a home equity loan. There are many informative articles here on LoveToKnow Mortgage with additional information about home equity loans:

• Read basic information on second mortgages
• Learn the popular uses for a home equity loan
• Get tips on qualifying for a low rate home equity loan
• Find out what to expect in fees and closing costs
• Learn about home equity lines of credit
• Understand the details of how to refinance a second mortgage

• Rent to Own By Owner
• List of Popular Mortgage Companies
• FHA Loan Guidelines

• FHA Mortgages and Home Inspection Requirements
• Help for Single Moms to Buy a House
• Escrow
• FHA Debt to Income Guidelines
• Free Home Inspection Forms

• Home Equity Loans Pros and Cons
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