What is a Home Equity Loan?

A home equity loan is also known as a second home mortgage when home owners get it. When a home mortgage is paid off by a certain percentage, (through a lumpsum or monthly mortgage payments), home owners in the process accumulate equity within the home loan. The equity represents the amount of the home loan paid off and shows what the home owner actually owns as part of the real estate property whether it is a home, house, condo, REO listings, foreclosure, etc.

Home equity is also dependent on the value of homes which can change due to macroeconomic and microeconomic changes within the economy. This equity can often be exchanged for another loan called the home equity loan. In most cases the interest charged on this “second loan” is often lower than other types of loans as it represents a stable income stream under the hood largely due to the payments you have made regularly to earn that equity. Home owners typically get a home equity loan for a number of reasons including home remodeling, college loans, etc. Home remodeling is a popular option given the remodeling can increase the value of the home in the process although many real estate experts recommend not overdoing or complicating it.

Home owners need to understand that a home equity loan is still a loan and monthly payments need to be made on time to retain ownership of the home or else they risk losing it to foreclosure. Home equity loans have become very popular recently and also have garnered negative reactions. In the recent economic downturn, many home loans that were defaulted included home equity loans. That does not mean home equity loans are not good, but home equity loans need to be considered carefully by home owners because of the various financial implications surrounding home equity loans.

You may also like to read:

  1. What is a Home Mortgage?
  2. Home Buying Negotiations
  3. Top Ten Mistakes Home Buyers Make
  4. What is Adjustable Rate Mortgage?
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