What is a Home Equity Loan?

Home equity loans give a homeowner the ability to borrow a lump sum against their home equity. Homeowners have the ability to use their home equity as collateral on a lump-sum loan from a lending institution.

This may be done on a paid-off home or on one with an outstanding first mortgage. People sometimes use these to pay for large expenses such as their children’ s college, or as a debt consolidation tool. When used for debt consolidation, a homeowner will take out a large loan against the equity they have in their home and use it to pay off debts to credit card companies and other creditors.

They can then focus on a single payment a month to repay the home equity loan, which usually will have a fixed rate of interest which is lower than what was being charged by the credit card companies and other creditors. All of the interest payments due on a home equity loan can be deducted just like regular mortgage interest at tax time.

Home equity can also be used to secure a home equity line of credit (HELOC) which functions more like a credit card than a loan. The amount that can be borrowed against home equity will be determined by the credit score and job security of the applicant, the amount of home equity, the appraised value of the home, and other factors.

Home equity loans that are not repaid could result in a loss of home ownership.