If you are thinking of applying for a home loan and you have heard of the home equity loans or the home equity line of credit, these are real loans. Now, don’t get fooled by the name “Home equity” or “Equity line of credit” these are terms we will discuss in a moment. What you really need to understand is that no matter how they put this you are still using your house as the securing asset or collateral. Regardless of what you may hear, this loan is really a second mortgage in disguise.
Equity is based on the value of your home less what you owe on it. Let’s say you bought your home 10 years ago for $150,000 with an annual rate increase of 6%, that’s 9,000 each year for a total of $90,000. Your house is now worth $240,000, from the lender’s point of view, so by taking away what you owe on the home in your first mortgage which could vary depending on the interest rate at the time of purchase, but let’s just say you owe $140k which we take away from the $240k and that leaves you with $100k in equity.
When you apply for a home equity loan this will be the amount you have available to you. But this loan is actually secured by your home, so keep this in mind. It’s not one of the unsecured loans with high interest rate, it is a loan that is backed by your home.
Keep in mind that if you are using your home equity as a line of credit; be aware of market changes because this also has an affect on equity lines of credit. Home equity loan interest rates are typically higher as well. The reason for this is they are normally only a 15 year loan, they can be extended further but this will coast a great deal more. You really need to weigh the pros and cons on home equity loans before making a decision.