by Frances Stanford

Created on: July 11, 2010

A home equity loan is essentially a second mortgage on your home. The amount of money you can borrow depends on how much of your mortgage you have repaid and the value of your home on the real estate market. For example, if you took out a mortgage for $150,000 of which you have repaid $25,000 in the past ten years and if you were to sell your home today, you would get $250,000, you have built up equity of $125,000. Most lenders will allow you to borrow 80% of this amount and there are some that will lend you 100% or more of this equity amount.

When you apply for a home equity loan, you do have to go through the same process as applying for a mortgage. The lender will certainly want a home appraisal carried out to make sure of the value of the home. You will also have to show your annual earnings to ensure that you do have the income necessary to make the monthly payment in addition to your regular mortgage payment. There are also legal fees associated with taking out a home equity loan because your home, or rather the equity, is the collateral for the money you borrow.

You are only permitted to have one home equity loan on the same home. You have a set monthly payment that is due at a certain time of the month. The loan is also for a set term, just like a mortgage. You do have a choice in locking in the loan at a fixed rate of interest or opting for a variable interest rate that allows you to take advantage of lower interest rates when market conditions dictate.

The money you borrow with a home equity loan can be used for any purpose you wish. You can use it to consolidate your debts so that you have one monthly payment instead of several. Many homeowners take advantage of this money to make renovations to their homes, which in turn adds more equity because all improvements increase the value of the home. However, it is important to keep in mind that you won’t be able to use this equity for another loan, but it will give you extra profit if and when you decide to sell.

It is important to consider all aspects of your finances before you take out a home equity loan. If your circumstances change and you are unable to make your payments, then you will lose your home to the lender. Without having such a loan, you will at least receive some cash from the sale of the home when you repay what you owe on the mortgage.

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