Home Equity Loan

A home loan which is secured by a second mortgage. It allows homeowners to borrow money with their home equity. The home equity loan is determined by taking into account the current market value of a home in addition to any existing liens.

A home equity loan, also known as a second mortgage, enables a homeowner to borrow as much as 125% of the homeowner’s appraised value of the home. For instance, if a home is valued at $300,000 and has a mortgage of $200,000 (with no other liens existing on the property), the amount that can qualify for a home equity loan could be $375,000 – $200,000= $175,000.

However, the full 125% is not available in many cases. Each lender stipulates unique requirements and limitations for loans to reduce the number of applicants and the possible amount that others can qualify for a loan.

These loans are used as an alternative to other types of loans, namely because the interest is tax deductible and is very practical when cash is needed to pay bills and other expenses. Additionally, the interest rate charged is also quite low. Another advantage with a home equity loan is that money obtained can also be used to buy a car, pay for college education, or anything else, much like the home equity line of credit.

Money obtained from a home equity loan can also be used to earn more income through purchasing property and making other investments. But it’s important to remember that a home equity loan has the effect of reducing your home equity by the equivalent amount of the loan and it increases your monthly mortgage repayment.