A Home Equity Loan is one in which you use the collateral in your home in order to get a loan based on the equity that you own in your home. The equity is the part of the home that you own and is found by subtracting the amount still owed on the home from the value of the home. Suppose you purchased a home for $100,000 and put $20,000 down when you first bought the home. Immediately, that $20,000 down payment turned into the equity that you have in your home.
Now, you have to take more into consideration when you are trying to figure out how much equity you have in the home. Suppose you have paid on your home for a few years now and you have managed to pay $12,000 on your home. Let’s further suppose that in these last few years your home has appreciated in value and is now worth $115,000. You would figure the equity as follows:
$115,000 (the value of the house) minus the amount left on the loan ($80,000 - $12,000 = $68,000) = the amount of equity you now own in your home which is now $47,000. For one thing, you can be happy that your $32,000 investment has turned into a whopping $47,000 so for a lender that is willing to lend 100% of the equity based on an appraisal of course; your home equity loan could be as much as $47,000.
There are some lenders that won’t lend under $50,000 on a home equity loan so this is not the route to go if you only want to borrow five or ten thousand dollars. In some cases, you can arrange a home equity line of credit which allows you to borrow on the equity in your home as you need to, not in one lump sum. This HELOC is an effective option for many people, and is an alternative to other financing for home repairs and other expenses. In other situations, you would want to pursue a personal loan. Pursue a home equity loan when you need to borrow big bucks however make sure you can afford to make the payments or you will place your home ownership in jeopardy.