What Is A Home Equity Loan?

It's important to know exactly "what is a home equity loan" or mortgage before discussing how to tap into this resource should the need arise.

Home Equity is the value of a homeowner's unencumbered interest in real estate.

Equity is calculated by subtracting from the property's fair market value the total of the unpaid mortgage balance and any outstanding liens or other debts against the property. A homeowner's equity increases as he pays off his mortgage or as the property appreciates in value.
So, when the mortgage and all other debts against the property are all paid in full, the homeowner has 100% equity in his property.

What Is A Home Equity Example...

If your mortgage is $100,000 and the market value of your home is $200,000, you would have $100,000 in home equity or worded in another way - 50% equity in your home.

One of the best strategies most financial planners will advise you to adopt is to pay off a mortgage in the shortest time frame possible.

Having said that, the big question is:

What is a home equity loan?
Is there a difference between a home equity loan and a second mortgage?

The similarity is that both use the home as collateral. The interest charged by both is tax deductible.(In the US.)

A second mortgage is usually a fixed amount of money for a fixed period of time with a fixed interest rate. "Usually" is the key here as in today's market, it is not always the case.

A home equity loan customarily works as a line of credit from which you can draw over time. Usually, a home equity loan carries an adjustable interest rate.

Which Is The Best Option?

If you need a lump sum of cash, a second mortgage is probably best since you will get a better interest rate on the loan.

If you need the money over a longer period of time, such as for home renovations that are planned over the next few years, it may be better to negotiate a home equity loan. That way you won't be paying interest on the money until you actually withdraw and use it. Once the home renovation project is complete, you can refinance and/or renegotiate the terms of the loan to better suit your situation then. (Check on E-Loan's Low-Rate Mortgage & Home Equity Loans)


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Home Equity Amortization Calculator: Display the breakdown between principal and interest in payments on your loan.

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