Home Equity Loan Definition or meaning-,The home equity loan allows you, as a homeowner, to borrow money while using the equity on your house as collateral. The lender advances the full amount of to the loan to the borrower, and it is paid back with a fixed interest rate over the term of the loan. This is sometimes referred to as a second mortgage, because it is a new loan using the same property as collateral.
Home Equity Loan Definition Or Home Equity Loan meaning
What is home equity loan
A home equity loan (HEL), also called a second mortgage, is a loan secured by the equity in a house. Equity equals the value of the house less the balance owed on the homeowner’s mortgage.
How Home Equity Loan Works
Home equity loans are commonly used to finance major expenses, such as medical bills, home remodeling or a college education.
Home equity loans are very similar in concept to traditional mortgages. For example, home equity loans generally must be repaid over a fixed period. Some lenders may offer fixed rates on these loans, others might offer variable rates.
Like mortgages, most lenders will also charge points and other fees for generating the loan, and these costs vary by lender.
Common home equity loan fee types:
Early pay-off fees
Read related: Home Equity Line Of Credit Vs Home Equity Loan
In some cases, the lender might charge a fee if the borrower prepays the loan. And because the loan is secured by a house, if the borrower defaults, the lender may foreclose on the house.
While home equity loans are similar in many ways to mortgages, it is important to note that they are not the same. Home equity loans create a lien on the borrower’s home — commonly second position liens — and can reduce its overall equity. Another difference is that home equity loans and lines of credit are typically for a shorter term than traditional mortgages.
A home equity loan is also not the same as a home equity line of credit (HELOC). A HELOC is a line of revolving credit with an adjustable interest rate that allows the borrower to choose when and how to borrow against the equity of their house. Home equity loans are single, lump-sum loans with a fixed-interest rate.
Why Home equity loans Matters
Home equity loans can be viable alternatives to credit cards or other high-interest, unsecured loans. Mortgage interest is tax deductible, making the interest rates on home equity loans sometimes lower than they appear when one considers the tax savings.
However, not all home equity loans are created equal. Borrowers are well served to compare fees, interest rates, and repayment terms among lenders. After all, when a borrower defaults, his or her home could very well end up belonging to the bank for good.
It’s important to understand what equity is, before borrowing money against it. Equity is the difference between what your home is worth and what you still owe on the mortgage; it can be seen as a percentage of the property that you own. In most cases, lenders prefer that you own at least 20% of your home before applying for a home equity loan.
Home equity loan meaning can be very beneficial. The interest you’re paying on the loan is tax-deductible—unlike the interest on credit cards—which is why so many homeowners use them to pay off their credit cards. The interest rate is also lower than most other personal loans, which is why people use home equity loans for large expenses like renovations, medical expenses, or tuition payments.Even though it works similarly, this is not a replacement loan for your mortgage. You are liable to make payments for both loans, or you risk foreclosure on your home.