Home Equity Loan

A home equitiy loan is a loan that you can take by keeping the equitiy that you hold in your home as collateral. To understand this we need to know what Home Equitiy is and what Collateral is.

Home Equity is nothing but how much of the value of the home actually belongs to you and for which you have paid. Let's take an example to understand this, suppose you buy a home giving a down payment for $20000 and the value of the house is $200000 today. The rest you will have to pay in mortgages. So your equity today is $20000. Now say after a year the house appreciates to $250000, you have been paying your monthly installments and the part of the principal (apart from interest) in your installments has been $5000 for the last year. So the value of your equitiy becomes the principal that you paid till now that is $25000 plus the appreciation of the home which is $50000 because that is also yours. So your total Home Equity is $75000.

Simply put that part of the house which you have paid for plus the appreciation. Collateral is the property that you pledge as a guarantee for the debt. This means that if you don't repay the debt the lender will take hold of the property and sell it to get his money back.

So to reinstate a Home Equitiy loan is a loan that you take keeping that part of your home as a security which you have already paid for and if you fail to repay the loan the lender will have the right to take possession of your home and sell it off to get his money.

Most of the time these loans have a repayment time of less than 15 years and is taken as one lump sum and once taken have to be paid off with a specified amount every month with a fixed rate of interest.

The interest that you pay on home equitiy loans may also be tax deductible but that depends on your current situation and you would have to take advice from your tax advisor to get an accurate picture of the same. Another benefit of course is that since this will be a secured debt you can get this for doing anything like buying a boat or taking a vacation and at competitive interest rates. This is because the loan is risk free for the lender as he has rights over your home and can sell it off to get his money back.

However buying a boat is hardly advisable!

The real benefit of this loan accrues from two facts