Introduction to Home Equity Loans

Home equity can be a difficult concept to understand if you have never dealt with home ownership before. Equity is defined as the monetary value of a property or business beyond any amounts owed on it in mortgages, claims, liens, etc. In simpler terms, home equity is how much house you have earned.

Equity is the difference between what your house is worth and what you owe on it. For example, if your house is worth $120,000 and you owe $100,000, your equity is $20,000. You can get a home equity loan, depending on your credit rating and a number of other factors, for the $20,000 that you have built up in equity.

Each lender will have their own set of rules on how much they are willing to give you for a home equity loan. Regardless of which lender, you think you would like to take a home equity loan with, it is imperative that you closely read all of the fine print of the loan. Some lenders will require a large balloon payment towards the end of the life of the loan. Other lenders may include a number of service fees on the loan, which will cause the overall cost of your loan to be quite high.

It is also very important to review all the terms to see what kind of charges would be incurred if you are late on a payment. It is best to have your home equity loan paperwork reviewed by a trusted friend or financial advisor that deals with these type of financial transactions on a regular basis, to make sure that you are getting what you expect in the loan terms.

A home equity 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 federal interest rate. The amount of the loan is usually made available in a lump sum. This is quite different from a home equity line of credit (HELOC).