How does a home equity loan work?

Is a secured loan where you borrow against the equity in your house. This is calculated by taking the appraised market value of your home minus what you owe on the house.

Say you paid $200k for your house and took out a $150k Loan. You apply for a Home Equity Loan(HEL) and the house appraises at $225k.

$225 – $150 = $75k in equity that you can borrow in a HEL

Good Luck !
R

Home equity loan often called a 2nd.

You apply for a home equity loan usually it’s a 20 year term with interest only payments for the first 10 years. Terms vary from loan to loan. As the equity in your house grows the amount available to borrow increases determined by the bank. These are based on 80% 90% 100% equity and interest is higher the greater the % borrowed. robhaya’s formula above is 100%.

You can get one when you buy the place or anytime there after. I got my first one to consolidate debts knowing I would be selling my place in the next couple of years. After consolidation I bought another home with 10% down 80% 1st and 10% home equity this allowed me to avoid PMI on the 1st.

Another use of the home equity is you can get the loan and never use the money for 10 years its available for you to borrow. Some people do this as a way to prepare for unexpected large expenses. or as a way to pay for kids college expenses as they occur, not having to borrow all the money at once, saving on interest.

At the end of the ten year draw period the loan converts to a 10 year amortized loan 120 equal payments of principle and interest. Interest rate is usually adjustable.