Home Equity Loan

Chances are that you've heard the term "home equity loan". Sometimes it seems that everyone is trying to lend you money based on the "equity" in your home, but very few of the ads and enticements to take out a home equity loan quite explain what a home equity loan is, or how they determine how much they'll lend you. Here's a simple primer of home equity loan terms and definitions that will help you sort it all through.

Each month, when you make your mortgage payment, you are literally investing money in your home ownership. A home equity loan allows you to use your investment in your home to finance other things that you need or want.

When you borrow money, the bank or finance company needs some assurance that you'll repay the loan-and a way to recover its money if you don't. Usually, they'll ask you to put up something of equal or greater value to the money they're loaning you as "collateral". If you fail to make your payments, the bank has the right to take your collateral and sell it to get their money back.

A home equity loan is money that is lent to you using your home as collateral. When you take out a home equity loan, you sign an agreement with the bank or finance company stating that if you do not repay your home equity loan, they can take possession of your house and sell it to get their money.

Since the main purpose of collateral is to secure your home equity loan (make sure the bank has a way to get their money if you don't pay it back), the bank will base how much of a home equity loan they're willing to give you on how much "equity" you have in your home. There's a simple formula for determining how much equity you have in your home.

Formula for determining home equity for home equity loan:

(Current market value of your house)-(amount of money you still owe on your mortgage) = (Your home equity)

For example:

You buy a house for $200,000, putting down a $20,000 down payment and taking out a mortgage for $180,000. As soon as the sale is final, your equity in the house is $20,000-the amount of money you have actually paid towards owning your house.

Since buying the house, you've paid $20,000 towards the principal of the mortgage, and the house has increased in value to $225,000. Your equity in the house now equals:

$225,000.00 (the current value of the house)-$160,000.00 (the amount you still owe on your mortgage) = $65,000.00 (your equity in your home)

Unless your credit is very good, most lenders won't give you a home equity loan for the full amount of the equity in your home, but there are exceptions. The amount of home equity loan that you qualify for can range from 50% of the equity you have in your home to 150% of your equity. Generally, the more equity you have in your home, the higher the amount of a home equity loan a bank will be willing to make.

A home equity loan can allow you to access the value of your home to do the things you want or need to do. You can use your home equity loan to pay for college or a wedding, make improvements or repairs to your home, go on vacation or anything else you want to do. For some more information on what you can use a home equity loan for, we suggest you continue reading this article.