What is a Home Equity Loan?

An owner can access the equity in their primary residence without having to sell his property such a settlement is known as a home equity loan. Equity is the amount that is the difference between the value of the home and what is owed against it. Home Equity loans are traditionally known as second and third mortgages.

Equity in the home can come from two sources. The mortgage amounts as they are paid over a period of time reduce the amount which is owed against the property. Eventually the real estate appreciation increases the value of the property. After several years of mortgage payments have been made the equity that can be accrued against such a property is substantial.

The banks and financial institutions always like to give a favorable rate on home equity because investment in the real estate sector is supposed to be the safest. Especially when the economy is stable and not struggling the real estate appreciation has always increased. The mortgage lenders have access to quasi governmental agencies such as the Federal National Mortgage Agency. These agencies reduce the lending rates and do this by shifting the interest risk away from the lender.

Home Equity loans do have favorable rates as compared to auto loans or credit debts but are definitely higher for a first mortgage. Refinancing turns a home equity loan into first mortgage.

Home equity Loan and Reverse mortgage are similar as they both allow access to cash value of the homeowner’s equity. A reverse mortgage is paid out in monthly or quarterly payments instead of a lump sum. The target of Reverse mortgage is the elderly generation who like extra income but don’t want to sell their homes.

In the case of death the home is either sold by the estate or gets reverted back to the lender, who then sells it himself.