Equity Loans FAQ

A home equity loan allows you to tap into the equity you've built up in your home.

A home equity loan is a way to obtain cash from your home and use it for home improvements, college tuition, medical expenses or other large purchases. Since a home equity loan is tied to your home, you should take the decision to obtain one very seriously. An understanding of home equity loan basics can help you make an informed decision about your financial future.

Equity Calculation

The equity in your home is the difference between what you owe and what the home is worth. For example, if your mortgage balance is $80,000 and your home will appraise for $100,000, your equity is $20,000. The equity in your home determines how much money you can borrow as an equity loan.

Collateral

Since you are using your home to obtain the loan, it becomes collateral, or security for the loan. This process is like your first mortgage, meaning that if you stop making your monthly payments, the lender can attempt to foreclose and take your home.

Fees

Some lenders charge the same fees for an equity loan that they would for a first mortgage, such as origination, closing, documentation or appraisal fees. However, some lenders do not charge fees as a method of getting new loan customers.

Interest Rates and Repayment

Interest rates on a home equity loan are generally fixed, which means that your payment will remain the same over the period of the loan. In general, you can obtain a home equity loan for several fixed periods, such as five years, 10 years and possibly 15 years.

Tax Deduction

The interest you pay on your home equity loan may be tax deductible, like the interest on your first mortgage. Typically, the interest you can deduct from taxes on a home equity loan is limited to loans of $100,000 or less. For example, if you obtain a $20,000 equity loan, you should be able to deduct the interest on the entire amount.

Loans and Lines

You can obtain money using the equity in your home in one of two ways: loans or lines. A home equity loan is a fixed-rate, lump-sum loan, which means you get all of the money at one time and pay the same interest rate over the entire period of the loan. A home equity line is typically a variable interest rate credit line that you can use and repay over a specified time period. The variable interest rate, along with the fact that you can use as much of your designated credit line as you need, means that your payments may vary over time.

References

• Federal Trade Commission: Equity Credit Lines
• Bankrate.com: What Home Equity Debt Is
• University of Maryland University College: Second Mortgages or Equity Loans
• Bankrate.com: Home equity loan interest is deductible -- to a point
• "Barron's Dictionary of Banking Terms, 5th Ed.", Thomas P. Fitch, 2006

Resources

• U.S. Department of Housing and Urban Development
• The Federal Reserve: What You Should Know About Home Equity Lines of Credit