Saving, Managing Debt, and Budgeting

Home Equity

What is a “home equity loan”?

A home equity loan, or second mortgage, is a loan financed by a bank that allows a homeowner to receive a lump sum cash payment for the value of the equity he has accrued in his house, or leverage the accrued equity of his principal residence. After you have been living in your house for some time, assuming that real estate prices have been increasing, you begin to build equity in your house. Banks allow you to borrow from them this value, or equity, in the form of a line of credit that can be paid off over time at the prevailing interest rate when you secure the loan. Many people use this loan to make necessary improvements on their home, which may increase the home’s value. As the house appreciates in value from the time of purchase, and the value of this asset changes over time, the house’s equity is the value of the house (according to the lender) minus the value of any previous loans or mortgages on the property. This value can be loaned back to the owner, to make improvements to the property, consolidate debt, or pay other expenses. You may borrow a certain percentage of this equity. You must pay fees and closing costs, and must pay off this loan, including interest, according to the terms set forth by the lender. Typical terms to pay off home equity loans range from five to 15 years. The full amount of the loan must be repaid if the house is sold before this term expires. The AARP reports that 16% of Americans age 50 used their home equity to pay down credit card debt.


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