Home Equity Loan Advisor

A home equity loan is defined as a consumer loan that is secured by the value of your house. Also known as a “second mortgage”, an “equity loan” or a “home equity line of credit”, these loans allow you to borrow against the value that has built up in your house over time. Home equity loans became quite popular starting in 1996 due to tax changes in that year that allowed consumers to deduct the interest of such debt in most cases.

Equity is defined as the difference between how much your house is worth now and how much you owe on your mortgage. The amount of a home equity loan is based on the difference between your home’s equity and the current market value of your home, which is determined by an outside appraiser usually hired by the bank.

When you take out such a loan, the bank or financial institution lending you the money places a second mortgage on your house (this is in addition to the initial or “first” mortgage that you received when you first bought your house). Your house is used as collateral by the lender to secure your loan. If you don’t pay off the loan, the bank could sell off your house to pay off the remaining balance.

Home equity loans exploded in popularity in 1996 as they provided a way for consumers to somewhat circumvent that year’s tax changes, which eliminated deductions for the interest on most consumer purchases. With this type of debt, homeowners can borrow up to $100,000 and still deduct all of the interest when they file their tax returns.

People often define home equity loans and home equity lines of credit the same but they are in fact two distinct types of debt. A home equity loan provides a simple lump sum of money and is paid back on a set repayment schedule. A home equity line of credit (HELOC) provides a flexible amount of money over time. With a HELOC, you only pay interest on the amount of money you drawn down from the loan. The interest rate on a home equity loan is usually fixed whereas the interest rate on a HELOC is variable.

Repayment schedules for equity loans are usually shorter than for first mortgages. Usually first mortgages have a 30-year amortization period, while equity loans are often repaid in 5 to 15 years. Interest on this debt is usually tax deductible.