Home Equity Loan FAQ

Building more than a home

What is home equity?

Simply put, home equity is the difference between the appraised value of a home and the remaining mortgage debt.

How do I build home equity?

Simply by making your monthly mortgage payment, you are building home equity. For the first year or two, however, most of your mortgage payment may be going toward interest on your mortgage, in which case you are not building much equity, if any. Thereafter, a greater percentage of your mortgage payment begins to apply toward your principle balance, thus building home equity.

What is a home equity loan?

A home equity loan, also known as a second mortgage, is a loan secured against your home equity. Typically, borrowers of home equity loans use the money to finance major expenses, such as:

Children's education

Remodeling projects

New vehicles

Medical bills

Are there different types of home equity loans?

Closed-end home equity loans and open-end home equity loans are the two main types. Closed end loans disperse a single lump sum upon the closing of the loan and do not allow additional borrowing. Open-end loans, also known as home equity lines of credit (HELOCs), allow the borrower to choose when and how much to borrow, up to a set limit.

How do I qualify for a home equity loan?

To qualify for a home equity loan, most lenders require the following:

Solid credit history

Stable financial situation

Reasonable loan-to-value ratio (remaining mortgage vs. home's appraised value)

What advantages do home equity loans have over other loans?

Home equity loans make it possible to complete home improvement projects or deal with unexpected expenses, and they typically offer much lower interest rates than credit cards and other types of credits and loans. Some lenders offer home equity loans with no annual fees or closing costs. Also, in the United States, interest on home equity loans is usually tax deductible.

How much can I borrow with a home equity loan?

Most lenders offer loans of up to 75 percent of your home equity, depending on the borrower's credit score and financial situation. Some offer all the way up to 100 percent or more. Any home equity loan that is greater than the amount of equity is known as an over-equity loan.

When do I have to repay my home equity loan?

Home equity loans vary greatly. Some may require no repayment for a beginning period, while others require monthly payments toward the borrowed amount right away. Generally, home equity loans are repaid in full over a period of between 10 and 25 years.

Am I putting my home at risk with a home equity loan?

With home equity loans, borrowers are using their home equity, not the home itself, as collateral. However, if at the end of the term of your loan there is a remaining balance, you will be responsible for paying it at that time. This is known as a balloon payment because it can grow indefinitely if a borrower misses payments or pays too little during the period of the loan. This balloon payment can be paid by refinancing with the lender or seeking a loan from another lender, but if you fail to make this payment, you could lose your home.

How does a home equity loan affect my credit?

Like any loan or debt, home equity loans will have an effect on your credit, but this is not necessarily a disadvantage. While a home equity loan debt may hinder your ability to borrow other funds, timely repayment will give your credit score a boost, thus creating a positive and robust credit record over time.

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