A home equity loan is a type of loan that is secured by the value of an individual's residence or real estate property. It allows homeowners to borrow against the equity they have built up in their home over time.
Equity refers to the portion of the home's value that the homeowner actually owns, which is calculated by subtracting the outstanding mortgage balance from the market value of the property. Home equity loans are often used for major expenses such as home renovations, medical bills, education expenses, or debt consolidation.
As a form of secured loan, the borrower's home serves as collateral, providing assurance to the lender that the loan will be repaid. Home equity loans typically have fixed interest rates and fixed monthly payments over a specified period, commonly ranging from five to fifteen years.
The amount a homeowner can borrow through a home equity loan is determined by the lender and is usually a percentage of the home's appraised value, subtracting any existing mortgage balance. This loan gives homeowners access to a lump sum of money, allowing them to utilize their property as a financial asset.
One key advantage of a home equity loan is that the interest paid may be tax-deductible, making it an attractive option for homeowners seeking to obtain additional funds. However, it is important to consider the potential risks, such as the possibility of foreclosure if the loan is not repaid as agreed.
