What is Home Equity?

If you have a mortgage loan on the property, you along with the lender own the property. The lender has an ownership stake in the property because they have financed the property purchase on your behalf, so until the mortgage is repaid in full, the mortgage lender continues to own an equity stake in your home. Such equity is termed or deemed home equity. The lenders home equity is equal to the proportional percentage of the principal and interest outstanding. Your home equity is the present fair market value of the real estate property minus all the outstanding debts on the property.

How Can Home Equity be Utilized?

Since you are a lawful owner of the property, you can utilize your home equity if you want to borrow against it or take out a loan using your home equity as the foundation of this loan. This often is referred to as a second mortgage or a home equity loan. Major expenses like home renovation, sponsoring your or your child’s education, and/or medical expenses can all be funded with a home equity loan. For instance, if your home is worth $150,000 with a mortgage of $90,000, then you are eligible for a $60,000 home equity loan. All mortgage lenders and financial institutions offer home equity loans.

Types of Home Equity Loans

Home equity loans are very similar to mortgage loans, but their tenures usually are in the range of 5 to 15 years. Depending on your needs and loan amount, you should decide which type of loan is suitable for you. There are basically two types of these sorts of loans and they are described and titled as follows:

• Fixed Rate Home Equity Loan – If you know the loan amount you need and have a well drafted plan for its repayment, then you should opt for a fixed rate home equity loan. A lump sum payment is made to you for a fixed period at a certain rate of interest. These interest rates do not change during any part of the loan period.
• Line of Credit – In case you are not sure how much funding you will require or need, then you should select this type of loan. For instance, if you plan to borrow for a wedding, you may not be in a position to answer how much money you are going to need. Under such circumstances, you are approved to borrow a certain amount. You can use the pre-approved amount anyway you deem fit. It works very similar to a credit card. You have a set spending limit, which you can withdraw according to your predilections. Interest is levied only on the borrowed amount at prevailing market rates. The repayment needs to be conducted monthly, similar to a credit card payment. The tenure however is fixed and needs to be adhered to.

Advantages of Home Equity Loans

Compared to other types of loans, home equity loans are easier to procure, conditionally if you have a solid credit profile and score. Since this is considered to be a second mortgage, the rate of interest is higher than the first mortgage; it certainly is much lower than other types of loans. Numerous tax benefits are also associated with home equity loans. This sort of loan is certainly much lower than a credit card in terms of interest rates. This is probably the reason why most people use a home equity loan for debt consolidation and paying for raging credit card debts.

Disadvantages of a Home Equity Loan

The biggest disadvantage of a home equity loan is that you can possibly be left without any home equity depending on if you borrowed against your entire home equity value. In simple terms, your investment in terms of real estate is zero after you have walked through the home equity loan door. Your property is fully owned by the bank or lender. And since the loan is comparatively easy to procure, many people misuse it to fuel their spending habits while trying to compete with the Joneses down the street while also entering a vicious cycle of debt. It is also not unheard of for unethical mortgage brokers to cajole the borrower to borrow more than the home is worth by paying higher fees. Thus, your home equity becomes negative and your debt picture is now truly bleak. The best option thus is to approach a reputed and competent mortgage broker to obtain a home equity loan that is financially logical for you.