Home Equity Loan Advisor

How does a home equity loan work? Put simply, you’re using the value of your home as a guarantee – or collateral – that you will pay back the money you borrow from the bank. If you don’t repay your debt, the bank can take your collateral and sell it to get its money back.

These types of loans work by tapping into your equity – the difference between how much your house is worth now and how much you owe on your mortgage. For example, if you purchase a house for $300,000 and you make a down payment of $30,000, the equity in your home would be the same as the down payment, or $30,000. Over time as you pay down the mortgage and the value of your house increases, your home equity increases.

So let’s move the clock forward five years. If you have been making your monthly mortgage payments on time, you might have paid down about $17,000 of your mortgage debt (the exact amount varies by loan), which means you now owe $283,000 on your mortgage.

At the same time, the value of your house has (hopefully!) increased a bit. Let’s say your home’s value is now $350,000. Your equity would then be $67,000: the $17,000 you have paid down + the $50,000 your house has increased in value. A home equity loan (or line of credit) is a second mortgage that allows you to turn your equity into cash.

Before diving into a home equity loan or a home equity line of credit, it’s important to understand some of the risks involved. While a home equity loan can provide a ready source of cash, you will need to make sure you have the resources to pay it off. Defaulting on a second mortgage can have the same impact as defaulting on your primary or first mortgage – you can put your home at risk.