How Does a Home Equity Loan Work?

You may have equity in your home. This means that the home is worth more than you owe on it. Take the value of the home and subtract how much you owe. This is your equity. You can borrow against this equity, and that is what a home equity loan is. In other words, part of the value of your home (your equity) belongs to you, and part belongs to the mortgage holder. Your home equity is one of your assets, and lenders will loan you money using this equity for collateral. They might give you a lump sum loan which you pay back in monthly installments. Or they may give you a line of credit for you to use as needed. You then make monthly payments on the amount you have used. Also, you will probably have to pay upfront closing costs, but some lenders will allow you to just add these costs to the amount borrowed.

To get a home equity loan, see a lender such as your local bank and apply. It is actually a second mortgage and it reduces your equity or ownership in your home. Be careful, you can lose your home if you can’t make the payments.

There are two major advantages of a home equity loan: The interest rate is lower than a credit card, and the interest may be tax deductible resulting in a lower income tax bill. However, you are putting your home on the line, and if you can’t make the loan payments, you could lose your house.