Home Equity Loan Basics

Home Equity Loans:

Equity is the difference between your home's current appraisal value and how much you owe on it.

For example, let's say you bought your home for $100,000, and at the time of purchase, you put 20 percent down payment ($20,000), and have managed to pay $10,000 towards the principle of your property. If your home's current appraisal value is $200,000, then you have $130,000 of home equity.

In order to tap into that stored money, you can either sell your home to get the entire equity, or you can refinance your mortgage if you don't need all that money at once. The second option also has the added advantage of low interest rates and tax deductibility.

Home equity loans allow you to borrow against the value of your home. They generally have a higher interest rate than first mortgages, but they are a bargain compared to the interest rates on some credit cards.

However, if you default on repaying your home equity loan, you can lose your home. That is why the majority of borrowers who obtain home equity loans are often middle-aged with secure jobs, with an average household income of $63,000, according to the Consumer Bankers Association.