What is Home Equity?

Home equity is the value of the home that the borrowers currently own. It is determined by the difference between the fair market value and the unpaid balance of the mortgage, if any. Homeowners enjoy increased equity as the value of their home appreciates or suffer decreased equity as the value of their home depreciates.

Home Equity Loans (HEL)

Home equity is often associated with home equity loans or (HEL). These loans are often used to pay medical bills, finance home repairs or pay for education. Taking out such a loan would create a lien against the property. The borrower is responsible for paying off this loan before a clear title can be provided to a potential buyer.



Sometimes home equity loans are referred to as second mortgages because the collateral is tied to the home. However, a home equity loan actually differs from mortgages in a number of ways. First, qualifying for a home equity loan requires good to excellent credit, which is not necessarily the case with first mortgages. Second, the duration of the home equity loan is often shorter. In some states and under certain circumstances, a home equity loan’s interest payments may be deducted from one’s personal income tax.

Home Equity Line of Credit (HELOC)

There is another loan associated with home equity referred to as a home equity line of credit (HELOC). A home equity line of credit is typically a revolving line of credit with adjustable rates, rather than a single lump-sum associated with a home equity loan.

Recently, property values throughout the U.S. have depreciated, leaving banks holding outstanding mortgages and home equity loans. Should the borrower default on their loans, the property is sent into foreclosure. Home equity financing is still available from lenders, although most are far more cautious given today’s economic environment about providing such loans.

Statistics regarding the uses of home equity financing are difficult to come by, but lenders believe that less than a third of home equity financing is being used as an investment, such as for home improvement. Rather, statistics show that home equity loans are most often being used for such consumables as vacations or new cars that quickly depreciate.

As a borrower, many of the same guidelines apply to home equity financing as to mortgage financing. For example, being solicited by a financial institution that is prepared to offer you a home equity loan may be suspect, since they are often the same companies who solicited first time mortgage borrowers at sub-prime rates.

Getting a Home Equity Loan

When searching for a home equity loan, remember-- networking is vital. Ask your friends, neighbors, relatives and colleagues what institution financed their own home equity loan or line of credit.

Fill out our free contact form today, and get access to the best lenders and best mortgage rates available today.