What Is A Home Equity Loan And How Does It Work?

Trying to find out “what is a home equity loan”? Allow this article to save you a lot of time in research. Without further ado, let’s dive right into it.


What Is A Home Equity Loan?

Home equity is the difference between the current value of the property and what you are owing on your mortgage. For instance, if your property is worth $350,000 and you owe $150,000 on your mortgage, then you have $200,000 in equity, say 57 percent.

The loan is usually repaid in equal monthly installments over a set period of time. Your lender has the right to repossess your home if you do not repay the debt as promised.

Your credit history, income, and home’s market worth all play a role in how much you can borrow and what interest rate you’ll have to pay. It is common practice among lenders to limit your home equity loan to no more than 80% of your house’s value.

Remember to check our article on how to get a home equity loan on

What Is A HELOC And How Does It Work?

HELOC, or home equity line of credit, is a loan wherein the lender commits to lend a maximum amount over a set period of time in exchange for the borrower’s equity on his / her home as collateral.

A HELOC allows you to borrow money against the value of your house, which serves as security for the line of credit. Like a credit card, your available credit is restored when you make payments on your outstanding balance.

Because of this, you can borrow against it at any time during your withdrawal period. However, this must be within the credit limit you set at signing.

Repayments commence after the withdrawal time and may last for up to 20 years.

What Does HELOC Stand For?

A HELOC stands for Home Equity Line Of Credit. Basically, your property serves as collateral for a revolving credit line you can use to fund significant purchases. The laters include the consolidation of the high-interest debt on other loans, including credit cards.

What Is Equity In Property?

To make it simple, the equity in your property is the percentage of your property that you “possess.” It’s the amount you’ve already paid out of your mortgage value including the initial.

What Is A HELOC Mortgage?

A  HELOC mortgage is a sort of second mortgage that allows you to borrow against the equity in your home.

You use the funds from the HELOC as necessary, similar to how you would use a credit card, and then repay after the withdrawal period.

To be more specific, with a HELOC mortgage, instead of borrowing a flat sum, you are getting a revolving loan whenever you need it against your equity.

Benefits Of A HELOC

There are few limits — You are typically free to utilize the funds as you see fit, whether for home upgrades, debt reduction, or even travel.

Convenience — A HELOC allows you to borrow just what you need up to 85 % of your property’s value, minus existing mortgage payments, during the withdrawal and the repayment periods.

Eligibility for a low APR – As compared to credit cards, HELOCs might have lower rates and cheaper startup charges.

Advantages And Disadvantages Of A Home Equity Loan

If you need to bear huge costs such as home improvements, debt consolidation, or diverse major expenses, a home equity loan may be a smart alternative.

One-Time Payment

The cash borrowed through a home equity loan is given to you in one single sum. This gives you the freedom to cover huge costs. For the agreed-upon number of years, you repay the loan amount with recurring monthly installments that go toward accruing interest and principle. Remember that if you sell your property, you must repay your home equity loan in full.

Deduction from taxes

Under some conditions, you may need to pay taxes on the interest you pay on a home equity loan if the loan was used solely for house upgrades. We recommend that you see a tax expert or visit IRS website for further details to determine if you qualify.

Fixed Fee

Home equity loans often have set interest rates that really are lower than those found on credit cards or any other unsecured personal loans.

In a fluctuating rate condition, a fixed-rate loan can give financial clarity since your monthly due remains constant over the term of the loan and never increases.


You can put the money to use for almost anything. You can utilize your loan to purchase an investment property, establish a business, or support another ambition. Some reasons for seeking a home equity loan may be more prudent than others, but once accepted, the entire amount can be used for nearly anything.

Closing Charges

Closing charges and fees for home equity loans generally vary from 2 percent to 5 percent of the loan amount. You may be able to roll these into the loan, but these fees should be considered while weighing your alternatives.

Your House Is A Collateral.

You might lose your house if you default on your home equity loan repayment.

Sometimes 2 installments To Pay

If you’re still paying off your first mortgage, you’re now responsible for making two housing-related monthly payments, which limits your revenue and may cause you to fall behind on other financial objectives.

In case you are wondering,

How To Get A Home Equity Loan Fast

To get a home equity loan fast, you need to meet the conditions of most lenders to the extent that they would not want you to apply with their competitors.

Home equity loans have a wide range of eligibility conditions, but here are some of the most common:

– Have between 15 and 20 percent in home equity.

– An annual DTI ratio of less than 43%

– You need a score of at least 620 on your credit report.

– The evaluation of your home with the current market value