Home Equity Loan - An extremely popular and efficient way to borrow is
using the roof over one's head as collateral for sizable amounts of credit. To
define a few terms, equity is the difference between your home's appraised - or
fair market - value and your outstanding mortgage balance. A loan refers to the
amount of money you borrowed from a lender providing you with the mortgage. So
basically, the idea with home equity loans is to borrow against your home's
equity as a very effective way to get some things you need at a good price.
Why Home Equity Loans are popular
To be sure, borrowing against the value of a home has become
increasingly popular. Why, you ask. There are two key reasons for this surge:
low interest rates and tax deductibility.
The tax changes that occurred in 1986 have eliminated deductions for
most consumer purchases. As a way to get around these changes in tax, consumers
began borrowing up on their home value in order to make purchases. Home equity
loans thus became a method adopted by homeowners to buy goods and still get a
For instance, let's say that you bought your home for $95,000 and made a
20 percent down payment of $19,000. To pay the remaining $76,000, you then took
a first mortgage. On the day you closed on your home, you automatically had 20
percent equity. As you pay off the principal, you gain equity and your home
grows in value.
Now, let's say that you have paid $12,000 toward the principal and your
property. Remember that you property was valued at $95,000 when you bought it.
Now, since you have made the payment on your principal, your $95,000-home is
now worth $115,000. Your beginning equity ($19,000), plus the principal you
have paid ($12,000) and the increase in your property value ($20,000) gives you
$51,000 in equity.
Home Equity Loans: Equity as a Valuable Asset
Banks and borrowers both benefit from home equity loans. The reason for
this is that equity is a valuable asset to have. You can put it to use without
having to sell your home. And because most people's domicile is their biggest
asset, lenders regard home equity loans as secure. For that reason, interest
rates for home equity loans are lower than for other loans.
Who are the best borrowers of Home Equity Loans?
Earlier in the article, we have made mention that home equity loans are
beneficial to both the lender and the borrower. However, like all things, home
equity loans also have their downsides. The disadvantage to home equity loans
is that if you default on the loan, the lender could foreclose on your home.
For this reason, home equity loans are statistically most suited to stable,
Tony Forster has a keen interest in living debt free having been "up to his ears" before realizing the need to take control. He has compiled an online financial article resource at