All About Home Equity Loans

You have probably heard a lot about home equity loans if you have spent any time at all looking at home financing options.  These are loans that are usually taken out by people who already own a home, and want to borrow against the value of the home.  Not everyone can get a home equity loan—of course, you have to actually have equity in the home, as well as the right credit situation.  Home equity loans are a great way to finance major renovations on your house.

What Is Equity?

It’s a term that is heard a lot, but for those new to the housing market, it might not be one you exactly understand.  It’s quite simple, really.  The equity in your home is the difference between what you currently owe on it and the current market value of the home.  You can achieve equity in your home in two main ways.  The first is by paying down your mortgage.  The second is by increasing the value of your home, either through renovations you have done or a general increase in the market.

Loans Vs. Lines Of Credit

Along with home equity loans, you have probably heard about home equity lines of credit.  While they are very similar, there is one major difference.  A home equity loan is basically like any other mortgage loan.  You take out a loan for the value of the home, and then you pay it back.  When you have paid it off, the agreement is over.

A home equity line of credit is a little different.  It allows you to borrow money against the value of your home in much the same way, but after you pay it off, you can borrow the same amount again.  Think of it like a credit card; you have a certain amount of credit available, and when you pay off what you owe, you can charge more to the card.  A home equity line of credit offers you an ongoing credit line available for any need you might have.

Whichever option you choose, be careful not to borrow too high an amount.  Pushing what you owe on your home back up to the market value can be dangerous.  If there is a dip in the market, you could suddenly find yourself upside down on the home.  If you have borrowed the money to make renovations, however, your improvements can make up some of that difference, building even more equity.