What is a Home Equity Loan?

When interest rates dropped, there was lot of talk about refinancing and home equity loans. Home equity loans can be used for many things and can be very handy, but what are home equity loans? A home equity loan is a loan that is secured with your home. In other words, you put up your home up as collateral or as a guarantee that you will make the payments on your loan. If you do not make your payments or default on the loan, the lender has the right the start foreclosure proceedings on your home.

A home equity loan cashes out the value in your home. For example, if you purchased a $300,000 home and you put a down payment of $30,000 and borrowed $270,000, your equity in that home is $30,000. There are two ways you can accumulate equity in your home. By making your payments so that the amount you owe on your home decreases. When this happens your equity increases. The other way is when the value of your home increases. Basically, the equity you have in your home is the difference between the amount your home is valued at and the amount you own on your home.

Taking out a home equity loan allows you to cash out some of the equity. People use home equity loans for many things. The most popular uses for home equity loans are debt consolidation, home improvements and college tuition. These loans are many times referred to as second mortgages.

Home equity loans are available in two types-the home equity loan and the home equity line of credit (HELOC). Home equity loans are a lump sum loan payment and HELCOs are a line of credit that is available to you. You do not necessarily have to use this line of credit. It can be there just for emergencies. The most common way to access the money is through a checking account, but it can be done with a credit card or bank transfer. Home equity loans will normally have a fixed interest rate where with a HELCO the interest rate is normally a variable rate.