What is a home equity loan?

Answer 1

The simple answer is "any loan that uses the equity in your home" or "any loan that places a lien on your home"is a home equity loan. It can be a 1st mortgage but usually it is the term used for 2nd mortgages. It can also be known as home improvement loan, fixed rate home loan or HELOC (home equity line of credit). Any of these loans will have a lien placed on your home. The lien will be released or satisfied when the loan is paid off either by timely payments, refinancing, or the selling of the home.

A home equity loan is a loan that is taken out against the equity in one's first or second home.

With a home equity loan you will get a certain dollar amount with a certain monthly payment. You will pay monthly until it is paid in full. If you need additional money, you will have to re-apply for another loan.

With a home equity line of credit, you have a limit you are allow to borrowed up to and your monthly payment varies according to the balance of your account. Some banks require you to pay only the interest due, some charge a certain percentage of the balance, generally 1 1/2% and some charge a higher percentage of the outstanding balance. Most line of credits have a 10 year drawn (in other words you can draw from your available credit limit for 10 years from the date the line of credit opened) then you usually have another 10 years to pay it off.

***** NOTICE****

A home equity line of credit is like you have a credit card with a large credit limit but your home is the collateral. If your payment requires you to pay on the principal, that amount goes back into the amount you can now draw from again. Example - You have a equity line with a $5,000 balance, with a credit limit of $10,000 and your monthly payment is $100 (of which $50 goes to interest and $50 to principal) the $50 paid to principal now goes back to the credit limit increasing your available credit limit to $5050.