Want to know it? How Does a Home Equity Loan Work
By: Want To Know It
Home equity loans are used by many people to pay off large medical bills, finance home repairs or improvements and pay for education. But how does a home equity loan work? This post will answer that question!
How Does a Home Equity Loan Work?
Everyone has a certain ‘equity’ in their home. It is calculated by subtracting any amount owing on a home mortgage from the true market value of your property (what you would get at an auction). So if you have a home worth $400,000 with a $100,000 mortgage you have a $300,000 equity in the property. A home equity loan lets you borrow against the equity in your property. In the example above, you would be able to take out a home equity loan up to $300,000 (depending on various factors).
Using the equity in your home as collateral is a great way of securing some extra cash for any need. Home equity loans are often referred to as second mortgages as you are borrowing against your home. If you fail to make the repayments on a home equity loan the lender has the right to sell your home to secure any money owing to them. Most home equity loans are non-recourse loans. This means that the borrower is not personally liable for the debt. However, some home equity loans are recourse loans and the borrower may be liable to pay the debt even on a foreclosed property.
Note: If you take out a home equity loan make sure you tell your tax agent as it may be possible to deduct the interest from the loan from your income taxes!
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