Home Equity is the difference between the market value of your home and what you
owe. For example, if you can sell your home for $200,000 and you owe $125,00, then
your equity is $75,000. A home equity loan, also known as a second mortgage loan,
is a closed-end loan that can have a fixed term, a fixed rate, and fixed monthly
payments or it can carry an adjustable finance charge rate that fluctuates with
a key index such as the prime rate. The loan proceeds are usually made available
in a lump sum.
A home equity line of credit gives you the right to draw on your funds, up to your
personal credit limit. The financial institution will determine your actual credit
line based on your income and financial obligations. You are given either special
checks or a credit card. Then you can draw on your credit line until you reach your
limit. A home equity line of credit gives you more flexibility and lower closing
costs than home equity loans.
Home equity products provide a relatively low cost credit source because they are
secured by your house. You have credit that is flexible enough to be available when
and where you need it. You can use the credit as you please, with the understanding
that your house is used as collateral. Tax laws allow the interest on home equity
products to be fully deductible for most purposes. Almost every bank and credit
union offers home equity loans or lines of credit.
Financial institutions negotiate a home equity loan just like a second mortgage.
You have to pay off the loan or credit line when you sell the house. The bank will
give you a lump sum amount and require that you make monthly payments for a specific
period of time. The home equity loan is a possible option if you need a specific
amount of money for a short period of time. An example would be a $40,000 home improvement
Your loan amount will be based on a percentage of the equity you have and what the
lender feels you can repay.
Want more information?
Ask a banker
Find a Lending Solution