Home Equity loans

What are home equity loans, and what can they do for you?

Home equity loans. We’ve all heard of them. But do you know what they are and how they work? Here’s a short guide to help you break down the process.

What is it? Simply put, “home equity” refers to the difference in the market value of your home and what you currently owe on your mortgage. The more you pay down your mortgage, the more equity you build.

What does that mean for you? You can use your home equity to your advantage by taking out a home equity loan, aka a “second mortgage.” You will get a lump sum of cash equal to the amount of your loan. A home equity line of credit (HELOC) will allow you to borrow money over a specified period of time.

How much can I get? The amount that you can borrow is often limited to 85 percent of your equity. Factors include loan-to-value ratio, credit score and appraisal of your home.

Nothing is free: Home equity loans often include the same closing costs as a typical mortgage, including fees, appraisals and points.

Word of warning: Your house is used as collateral in a home equity loan. If you default on the loan, you could find yourself in foreclosure and possibly lose your home.

You got the loan, now what? You can use a home equity loan for anything. That’s right. You can use it to consolidate your debt, pay for college tuition or finally add that master-bedroom retreat you’ve always wanted.