Home Equity Loan Advisor

A home equity loan consists of a second mortgage that is secured against the value of your home. When you first bought your home you most likely took out a mortgage to finance the purchase. This is known as a “first mortgage.” A home equity loan or line of credit is called a “second mortgage” because it is in addition to the initial mortgage that you received when purchasing your house.

Since you first bought your home, two things may have occurred to build up equity in your house. First, you have been paying down the principal of your mortgage. Every dollar you have been paying down on your principal is a dollar more in equity that your home holds.

It should be noted that when you pay down a mortgage, you are paying off both principal and interest. In the early years of your mortgage you are paying off more interest than principal with each monthly payment, so if you purchased your home recently you may not have paid down as much of your principal as you might expect. Check with your bank to see how much principal has been paid because it’s only the principal and not the interest payment that builds your equity.

The second thing that may have happened since you first bought your home is that the value may have gone up. Of course, in many areas of the country home values have gone down. If you purchased your house recently in an area of falling home prices, you have not have built any equity yet. Over time, however, as the value of your house increases above what you paid for it, this creates equity.

A home equity loan consists of a loan that taps into the value that has been built up in your house. For example, let’s say that you have a $100,000 mortgage on your home and that you have paid off $30,000 in principal. Let’s also say that the value of your home has increased by $20,000 since you first bought it. That means you now have $50,000 in equity ($30,000 in principal paid off plus $20,000 of increase in home value) that could be accessed by taking out a home equity loan.

The exact amount of equity you are allowed to access through a home equity loan varies by bank, but generally lenders will not go above 80% to 85% of the appraised value of your house minus what’s left on your first mortgage (this is known as the loan to value ratio). Other factors that determine how much equity you can draw upon include your credit worthiness and your annual income.