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How a Home Equity Loan Works


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TERMINOLOGY

Borrowing from your home equity is a great strategy to get money for certain things that you may need. A home equity loan is commonly promoted by financial institutions across the world. With the easy access to funds, more and more homeowners are taking advantage of favorable terms for home equity loans. If you've never had a home equity loan, you may be confused as to how it works because there are big differences compared to standard loans.

Second Mortgage

A home equity loan is sometimes referred to as a second mortgage because you are borrowing against your house and the loan is placed in second position. You still keep your primary mortgage through your mortgage holder, and the debt is added to the house. Therefore, the difference between what you owe on the house and the value of the house is what acts as collateral for the loan. If you were to default on both loans, the primary mortgage would get first access to the funds from the sale of the house, followed by the home equity loan holders.

Application Process

The home equity loan process is very similar to getting a mortgage. First, you shop around with several banks and financial institutions for the best rate and costs. Once you find a place that you want to do business with, you fill out some paperwork. The bank will review your credit history, your ability to repay the loan and several other factors. If you get through the preliminary process, they will want to perform an appraisal on the house. This is how they determine whether or not the house is worth enough to borrow what you need. If it is determined that the house is worth what you said it was and everything else checks out, the loan will move forward. The loan process works very much like standard loans and the turnaround time may take anywhere from 10 to 60 days to close. The process will depend largely on the bank, their process and the number of applicants they need to process. Once the loan closes, you are provided with a credit card or check book and can write checks out to whomever you require.

Advantages

Using a home equity loan has several advantages compared to other forms of lending. One of the biggest advantages is that the interest you pay on the loan is tax deductible. The tax benefits can be extensive because you will be able to deduct the interest from your primary and secondary mortgage. In the first part of the loan the majority of your payment will be interest, so this could be a big deduction.

Another advantage is that you can tap into your equity in your house without having to sell your house and move. Many times, you don't really want to have to pack up and move, but you need the money for a variety of reasons. The home equity loan allows you to get access to this money without all of the hassle. This can be a big advantage to those who need money quickly.