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Simply put, a home equity credit loan (HEL) is a loan (mortgage) that borrows against the equity of your home. The equity in your home is the actual amount (value) that you, the homeowner have invested in the property as is related to the actual market value of the home.

How It Works

Let’s say, for example, that the appraised market value of your home is $100,000 and your current mortgage balance is $80,000; the equity in your home is then set at $20,000. The majority of lenders will allow homeowners to borrow up to 80% of the equity in their home. However, a select few will allow homeowners to borrow up to 100% of the available equity.

Credit & Income

Even with a large amount of equity built up in your home, you may not automatically qualify for a home equity credit loan. In general, loan providers require the homeowner have excellent credit in order to quality. Having maintained a good payment history on your home, as well as increased or at least maintained your original income will go a long way towards assisting you in qualifying for the home equity loan. Additionally, these factors will ensure you get the best possible interest rate available to you.

How Equity Is Built

Every payment that you make towards the home mortgage balance decreases the overall amount of the mortgage on the house, and increases the amount of home that you actually own free and clear. If the home appreciates in value, the amount of equity in the home also increases.

What Can The Money Be Used For?

There are no restrictions on what the lump sum payment from the Home Equity Credit Loan can be used for. The smartest solution for any homeowner with debt beyond their mortgages is to use the bank loan to pay off high-interest credit cards. The, oftentimes, outrageous interest paid towards credit card balances is not a tax deductible payment; however, the interest paid towards a mortgage and home equity loan is 100% tax deductible

The money obtained from a home equity loan can, also, be used to make improvements to the home, buy a car, or buy a car.

Interest Rate

As with a standard home mortgage, there are often interest rate options available for a Home Equity Loan in the form of a fixed interest rate and an adjustable interest rate. Yours will be determined by the amount you are borrowing, the term of the loan, and your credit.

Risks

Be acutely aware that, since your home is used as collateral for the loan, there is a good chance that you would be at risk of losing your home if you defaulted on the home equity loan; even if you are current on the payments on your original home mortgage.

In addition, should your home be foreclosed upon, you may still be personally responsible for repaying the home equity loan.

This loan differs from a equity line of credit; do not get the two confused. With a loan you receive a lump sum payment at the time of closing. A line of credit will allow you to borrow against the equity of the home at any point in time during a loan period, generally 5-10 years.

About the Author

Ryan F – Real Estate and Mortgage professional.

Bringing you the latest information on the latest in mortgage home loans and other mortgage and bank loan related topics. Check out my website to learn more about this interesting topic.

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