What Is a Home Equity Loan?

What Is a Home Equity Loan?

Updated on November 23, 2021

Have you seen references to home equity loans and wondered what they were? These loans are available to homeowners, and the loan is secured by using their home as collateral.

Who qualifies for home equity loans? What can you do with them, and how do you apply for one? Read on to learn about this flexible means of borrowing.

What Exactly is a Home Equity Loan?

A home equity loan allows you to borrow money using the equity you’ve built up in your home.

Let’s look at an example of how equity is determined.

  • A financial institution assesses the value of your home. Say that value is $200,000.
  • You subtract the amount of money you still owe on your mortgage from the value of the home.
  • The resulting number represents the equity you have in the home. So, if you owe $150,000 on that $200,000 home, your equity would be $50,000.
  • It’s important to note that financial institutions may have limitations on the percentage of your home’s value they’ll allow you to borrow. You should check with your potential lender to see what restrictions they may have in place.

You may have also heard home equity loans referred to as second mortgages. This is because there is often still an existing mortgage on the home. This loan is your primary mortgage, and the home equity loan becomes the secondary one.

What’s the Difference Between a Home Equity Loan and Home Equity Line of Credit?

You may have also heard of a home equity line of credit, or HELOC.

Home equity loans – PSECU calls these real estate loans – are generally disbursed in one lump sum. If you borrow $20,000, for example, you receive the entire amount at once. HELOCs differ in that they function as a revolving line of credit that you can repay and draw on repeatedly over time. To access HELOC funds, some lenders issue checks or a card you can use to charge things on. At PSECU, though, you’ll move money from your line of credit to your checking account to use as you wish. Regardless of where you open your line of credit, you don’t have to use the entire line of credit at once, but it’s available if you need it.

Repayment terms are another major difference between the two types of loans. You pay a fixed interest rate on a home equity loan, and you begin paying back the loan as soon as you take it out. The loan is repaid in equal installments over a fixed term, and the interest applies to the entire sum of your loan.

For a HELOC, you pay back only the money you have withdrawn, and only that amount is subject to interest. The interest rate on advances can be variable, meaning it rises and falls over the repayment term, or fixed, meaning it stays the same.

One thing these loans have in common is that the interest you pay may be tax deductible; for more information, check with a qualified tax professional.

What Can You Use a Home Equity Loan For?

People use home equity loans for a variety of needs. Most people opt for a home equity loan over a HELOC if they have something significant they need to pay for right away, such as home improvements, college tuition, or unexpected medical expenses. This loan may be a good option for any circumstance when you need access to a large amount of money fast.

How Can You Apply for a Home Equity Loan?

You’ll want to find the financial institution that offers the best terms and conditions for a home equity loan. You can use online calculators to see projected monthly payments based on the amount you borrow. Make sure you can afford the payments and be committed to making them on time.

To apply for a loan, you’ll need to:

  • Have a strong credit history
  • Have a good debt-to-income ratio
  • Meet the equity requirements of your lender
  • Know how much you want to borrow.

Once you’ve received approval for your loan and before signing the documents, be certain you understand the terms and when you need to make your payments so that you don’t default on the loan.

Learn About Our Home Equity Loan Options

Are you considering getting a home equity loan? Get in touch with PSECU. We can talk to you about our equity options, including current rates. Contact us today to get started.

Check out our WalletWorks page for more tips on saving money.

The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Some products not offered by PSECU. PSECU does not endorse any third parties, including, but not limited to, referenced individuals, companies, organizations, products, blogs, or websites. PSECU does not warrant any advice provided by third parties. PSECU does not guarantee the accuracy or completeness of the information provided by third parties. PSECU recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.