What is a Home Equity Loan?

mortgage as equityWhat is a home equity loan? A home equity loan is the one time lump sum you borrowed and intend to pay each month for over a set amount of time, using your home as collateral.

 

Let me explain in detail. First let me identify the considerable factors involve in home equity loans. Foremost is the collateral. The property you set as a guarantee that you will pay you debt or loan is referred as collateral. The dictionary defines collateral as an acceptable property guaranteed as a security pledge against the performance of an obligation. If you fail to repay the debt, the equity lender can take your collateral and sell it to regain its money back. One example of such is through public auction, where the homeowner has the right to acquire it back first among other bidders. If the last bid can’t sustain to the standing balance of the existing payable, still the creditor has the rights to decline as it would then be a loss on the part of the creditor.

 

Second significant factor is the equity. Equity is defined as the residual value of a property beyond any mortgage. So exactly, the value is given on how much you have paid for and how much is left standing on mortgage, plus how much is the present value of the house (could be a lot if included in the terms). The difference total would define as the home’s equity.

 

Rudimentary speaking, as you apply for a home equity loan the bank rate surveyor checks your property (existing market rates). The property would then stand as the collateral. When the worth of the collateral is identified, the existing mortgage balance is then subtracted from the collateral value. The difference would then be the actual home equity loan.

 

Going back to our first definition, home equity loan is a one time lump sum you borrowed and pay each month. It has fixed interest rates and you pay fixed sum every month. For the duration of the contract, you are not allowed to make another loan until the balance is repaid.

 

For illustration, let us say that I bought a property worth $500,000 by the seaside. The area was quite uninhabited the time of my purchase in 1995. I made a down payment of $100 and left $400 on mortgage. Over the next five years, with the monthly payments I made, I already got $250 paid but the house worth had risen to $600. Still I have the remaining mortgage debt of $250, but when I checked the Home Equity Loan Status I found it I have a $350 credit value. It’s $600 minus the standing $250.

1 Comment to "What is a Home Equity Loan?"

  1. September 3, 2011 - 2:04 am | Permalink

    Hi

    I have been a finance broker for quite a few years now and your thoughts on the current financial signals Australia is experiencing is a view not commonly held.
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    Thanks for sharing

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