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What are Home Equity Loans?

A home equity loan is a loan that you can take out against the equity in your home. Of course, to understand a home equity loan (also called Cash-out Refinace), you first need to understand what is meant by home equity. The term equity refers to the difference between the amount your home is worth and its appraised value. If the home is worth more than the amount owed you have that much equity. This is usually the case. If you owe more than the home is worth, however, you have negative equity – this is not a position you want to be in.

Home equity loans are made for an amount that is somewhat less than the amount of equity. In most cases you can borrow up to 80% of the equity in your home – if you're trying to borrow $25,000 or more. Usually if you want an amount less than $25,000 and have at least $25,000 in equity you can get the entire home equity loan approved.

Types of home equity loans

Home equity loans are usually made one of two ways. In a standard home equity loan you will receive a check from the lender for the entire amount of the loan. You will then make monthly installment payments to repay the amount borrowed, plus interest. Like any installment loan, the home equity loan has a maturity date by which the loan must be repaid in full.

Home equity line of credit

More common than the straightforward home equity loan these days is the home equity line of credit (HELOC). In a home equity line of credit you are granted a credit line equal to the amount you are borrowing. This credit line works like a typical revolving charge account (credit cards are the best example of another revolving account). As you withdraw funds from the home equity line of credit, the available credit line decreases. As you make payments, the line increases. Home equity line of credit also have a maturity date. When the maturity date arrives, the line is no longer available for withdrawals and any unpaid balance must be paid.

Second mortgage

A home equity loan is the same thing as a second mortgage. The two terms are used interchangeably. When you take out the home equity loan a lien is placed against your home by the lender. This line is placed in the "second position" behind the original mortgage. Mortgage or lien positioning refers to the order in which the creditors are paid in the event the home is sold or foreclosed. The mortgage or lien in the first position is paid first and so on.

Why home equity loans?

The reasons for a person's taking out a home equity loan are as varied as the homeowners themselves. In most cases a home equity loan is obtained in order to have an emergency source of funds, to make improvements on the home (and thereby create additional equity), or to make some other large purchase. People will use home equity loan funds for everything from their child's college education to purchasing an automobile or big screen TV. The choice is literally up to the borrower. Find out how much you can cash in your home equity now!


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