A home equity loan is also called a second mortgage, a term loan, or equity loan. A lender or financier allows a home owner to take money from him on mortgage, against the home equity the borrower has. You can use a home equity loan calculator to partially determine the home equity the borrower has.
What is home equity? This is difference between the value of your home and the amount you owe on the mortgages.
With an example you will be able to understand this better. Say you have a house with a value which when considered in dollar terms would give you $400,000. When you bought it you had paid $40,000 as down payment, and towards the principal amount you have paid an amount of $80,000. That means your home equity would now be $120,000. This is calculated as the value of home $400, 000 minus the $280, 000 still outstanding = $120, 000. A home equity loan calculator lets you determine the home equity roughly, considering your credit score and income, besides the home equity. The value of the home appreciates in the long run, and the mortgage payments run down, resulting in the home equity building up, and the larger is the home equity loan you’ll then qualify for.
The greatest benefit of a home equity loan is that you get the entire amount in one payment. This amount has to be paid off in about 15 years, and the terms may vary for different loans. The interest rate remains constant throughout; that’s how a home equity loan works.
A home equity loan can be used for any purpose you may envision. Usually these loans are availed by people to make home improvements, to do repairs and maintenance, and of course to pay off other mortgages which have a high interest rate on them. These are also used to pay college fees for children.
If you are in need of huge amount and you are confident that you can repay, then you can make use of a home equity loan. The rates for a home equality loan tend to be lower than credit card rates, so this is an easier and more beneficial option. But if you find any problem with repayment then your home equity will be in peril and you’ll run the risk of losing your home. So consider well before you make a move in this direction.