Home Equity Loans

What is home equity? Home equity can be defined as the difference between how much money is left owing on your primary mortgage and the market value of your house. That amount of money is known as equity. For example, if your home has an appraised market value of $100,000 and you owe $80,000 on the mortgage, you have $20,000 worth of equity in your home. Home equity is money that you have ‘saved’ by investing in your home.

Home equity loans are also known as second mortgages. The property you are mortgaging for the second mortgage is held as collateral for the money lent to you. Second mortgages are usually set with a shorter term than the first mortgage and are riskier for lenders to give out. Because the home is held as collateral for both the first and second mortgage, if you should default on your payments, the first mortgage would be paid off first during the sale of your house after a foreclosure by the bank. If the proceeds from the foreclosure sale do not cover both mortgages, the second mortgage would not be paid in full—leaving the bank to go after the borrower for the remaining funds. Because the risk of second mortgages is much higher than the first, they usually carry a higher interest rate and require you to have a good credit history.

Equity is built into your home each month—it starts the very moment you get your mortgage with the money you put down on the house with your down payment—that money is considered to be equity. Every time you make a payment, some of that payment is made to the principal—original amount—of the mortgage and thusly builds equity in your home. Equity can be determined by the current appraised market value of your home minus any liens on your home (primarily the first mortgage). The monetary amount that is over and above the liens is the equity amount. This equity amount can be borrowed against through a home equity line of credit or home equity loan.

Once you’ve been through the vexing experience of closing on a home loan, you will find applying for a home equity line of credit to be far less stressful and less complicated. Don’t expect to walk into a bank with your signature and walk out with a blank check, though. There are steps to applying for a home equity line of credit you should be aware of beforehand.

Prepare to bring proof of income (federal income tax returns for the last 3 years and/or check stubs), property ownership, property value and your social security number. You will need this information for each of the owners or borrowers.