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Home Mortgage Preparation :: What is a Home Equity Loan
What is a Home Equity Loan:
What is a Home Equity Loan and How can it Help?
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When looking for a definition of what is a home equity loan, a quick Google for the definition of equity gives this response, “the difference between the market value of a property and the claims held against it.”
Let’s get a slightly better understanding of what is a home equity loan.
How Home Equity Works
Everything we have has some kind of value. Your home is probably the most valuable thing you will ever own. Because most of us cannot walk up with hundreds of thousands of dollars in cash to buy a house, we buy them on credit. That simply means you had to borrow money to get the house.
A house’s value is, in reality, what a person will pay for it, not what an appraiser says it is worth and probably not what the seller thinks it is worth. However, in the banking world, what the appraiser says, goes.
Equity Factors
The difference between the amount you owe on any home loan and the house’s value is called equity. This is an amount which you can borrow back in what is a home equity loan, and you can use that money as you wish, though many use it for repairs and home improvements.
At any time the owner can request, at their own expense, an appraisal to be done of their property. After 5 years there is likely to be some changes in the housing market in the area. This can mean either an increase or a decrease in value.
For our purposes, we will say the property is now appraised at $300,000. This increases the amount of equity in the home to $150k and the ‘loan to value’ is now half.
What a Bank will do for You
Lending institutions will give you what is a home equity loan against this ‘value.’ In most cases the interest paid is tax exempt, just like your primary mortgage. It works in similar ways as a second mortgage but with much less paperwork so many people prefer this option.
The bank can see that there is enough value in the property, as opposed to already established loans against it. All this is based on the current equity, and the loan amounts dealing with the particular subject property.
So, now you know what is a home equity loan you can see why people are increasingly looking to free up finance that way.
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Home-Mortgage-Preparation.com :: What is a Home Equity Loan