How Home Equity Loans Work

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When you buy a house, you might not have a lot of equity in it at first. Over time, you can build equity in it, though. Do you understand what equity is and how it works? If not, you should learn more about it, and you might also want to learn about home equity loans. As a homeowner, you might need to apply for one of these loans in the future, so it is helpful to learn what they are before you need one. Here are several things to know about home equity and the loans you can get with your equity.

The Definition and Calculation of Equity

Equity is a word that refers to how much of a house you own. You can phrase equity in terms of a dollar amount or percentage. Suppose you buy a house with a 20% down payment. You will start as a homeowner with 20% equity in the house. If the house cost $200,000, and you borrowed $160,000 to buy the house, you have $40,000 of equity in the house. You can calculate the equity of a house by subtracting the amount you owe from the home's value.

How Equity Loans Work

You can get two types of home equity loans. The first type is a lump-sum loan, and lenders call these equity loans. When you get this type, you apply for a specific amount of money. If approved, you get the entire amount all at once with a repayment schedule. The loan might last five to thirty years, and you must pay a monthly payment until you pay the entire balance.

The other type is a home equity line of credit (HELOC). A HELOC provides you with a credit line for the equity you have in your home. You can borrow against it whenever you wish, and you must repay it before borrowing more. After repaying it, you can borrow against it as many times as you would like.

What You Might Need Before the Lender Approves Your Loan

To get a home equity loan, your lender will need two things. First, they will evaluate your credit and finances to ensure that you qualify for a loan. Secondly, they will require an appraisal to determine your home's value.

Some homeowners never borrow money against their equity, while others do. If you would like to learn more about these loans, talk to a home mortgage lender that offers equity loans.