What is a home equity loan?
A home equity loan, like a mortgage, is when a financial lender lends money to you, and secures it with the equity in your home.
Depending upon how much equity is in your home, and how much the lender is willing to finance, determines how much money a homeowner can borrow.
Lenders typically will not allow you to borrow up to 100% of your equity, they will probably limit it at 80%.
Equity in your home, is determined by how much the fair market value of the property is, minus any existing loans and mortgages that already exist.
If your home is worth $200,000, and there is an existing $120,000 mortgage on the property, then the equity in the home is $80,000. ($200,000 – $120,000 = $80,000)
If you get a simple loan, where the lender allows up to 80% loan to value, then in this example you could borrow up to $40,000.
$200,000 x 0.8 (80%) = $160,000 (80% of value)
minus $120,000 (amount of the existing mortgage)
= $40,000
The terms for these loans can be just about anything. From 5 years to 30.
You could probably find an amortized loan or an interest only balloon loan.
This could even be in the form of a home equity line of credit (HELOC) where you can write checks against your home equity, and treat it like a credit card.
Remember, the payment to the home equity loan is in addition to any existing loan(s) you currently have on your home.
We encourage you to talk to several professionals, (loan agents, mortgage brokers, accountants, financial adviser) before making any decisions about whether or not a home equity loan is right for you.
We offer calculators to help you determine the payment amount and payoff date.