A home equity loan is a type of loan where homeowners borrow money by using the equity in their home as collateral. Equity is the difference between the current market value of the home and the outstanding balance on the mortgage. The loan amount is typically based on a percentage of the home's appraised value minus what is owed on the mortgage. Key points about home equity loans:
- They are sometimes called second mortgages because they are secured by the home, similar to the primary mortgage.
- Home equity loans usually provide a lump sum of money that is repaid in fixed installments over a set period.
- They typically have a fixed interest rate.
- Home equity loans are often used for major expenses such as home repairs, medical bills, or education.
- Borrowing against home equity carries risks, as failure to repay can lead to foreclosure.
- Home equity loans differ from home equity lines of credit (HELOCs), which are revolving credit lines with variable interest rates, while home equity loans provide one lump sum with fixed terms.
In summary, a home equity loan allows homeowners to borrow a lump sum against the value of their home to meet financial needs, with repayment made via fixed monthly payments over a specified time.
