Home Equity Loans

For example, if you still owe $225,000 on your mortgage and the market value of your home is $325,000, you have $100,000 in equity.

Equity is generally significant with a homeowner who has owned his or her home for a long time, or where market values are rising rapidly.

Home equity loans are granted by banks, mortgage brokers, credit unions, private lenders, and other real estate lenders. When lenders grant these loans, they secure them with a "second mortgage" on the property.

This mortgage encumbers the title of the property until the loan is repaid. Most equity loans have variable interest rates that fluctuate with economic conditions; this interest is usually tax-deductible.

There are two main types of home equity loans: a conventional equity loan and a line of credit. With a conventional equity loan, you receive the proceeds in a single, lump sum and pay interest on the entire principal from the beginning.

With an equity line of credit, you can withdraw and repay money from an equity account and pay interest only on the money that you're using.

Where there is strong equity in the property and a reliable borrower, home equity loans are generally quick to obtain and hassle-free.

This can be both positive and negative. Because equity credit can be easier to obtain than other loans, borrowers are prone to take advantage of the ready cash. As they do so, their equity in their home goes down and their monthly payments go up.

If you are considering a home equity loan, be particularly wary of home equity loan scams.