Home Equity Loans Defined



What Are Home Equity Loans

Before you can understand what home equity loans are, you must first know what equity is. According to the United Federal Reserve Board, equity is the difference between the fair market value (appraised value) of the home and the outstanding mortgage balance. So if your current mortgage balance is $50,000, and your house is appraised at $100,000, you have $50,000 in equity.

Financially, equity in a home represents the portion of a home owned by a individual. When the house is sold the money is given to the homeowner to do with as they please.

A home equity loan, is a creative type of loan backed by the amount of equity a person has in their home. These types of loans are sometimes called second mortgages and are very common. It is important to understand that when a home equity loan is taken out on a property, the amount that is borrowed against no longer belongs to the individual. It belongs to the lender who has "loaned" you your money.

Home equity loans can be taken out from either the bank that provided the mortgage or by another financial institution. It is important to know that defaulting on either payment can result in foreclosure. Therefore, be sure that you completely understand the terms of your home equity loan.

Some of the many uses of a home equity loan are presented on our review of home equity loans.

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