What is a secured home equity loan?

Discover how borrowing against your home value can work for you.

Homeowners have an option open to tap into their equity in the form of a secured home equity loan.

When it comes time to make improvements to the house, it can get quite expensive. These loans can be convenient and use the home as collateral.

A home is an investment that usually appreciates in value. Equity is defined as the home's fair market value less the unpaid balance of the mortgage as well as outstanding debt overhead on the home. For instance, lets say that you buy a house for $100,000 and pay on it for 10 years. At that point, you have an outstanding principal of $93,000 and the home has a fair market value of $135,000. Along the way, you install a roof and siding on a personal loan of $25,000 which has a balance of $17,000.

The equity in this example is $135000 - $93000 - $17000 for a total of $25000.

The basis of a home equity mortgage refinancing loan is for you to borrow or use that equity. Usually this is done for major repairs, remodeling, pay medical bills or a college education. As with all loans, there are factors determining eligibility. These factors include credit history, income and the collaterals appraised value among others.

Home Equity Loans FAQ

There are a number of fees that may be applied to a home equity loan. Some of these are application fees, appraisal fees, origination fees, title fees and arrangement fees. Before you sign or agree to anything, be sure to read the terms carefully and ask questions. Ensure that you understand all the fees associated so you don't get any unwanted surprises at closing time.

How Home Equity Loans Work

Secured home equity loans loans are normally at a fixed rate but are also available as adjustable rate loans and flexible payment loans. By far, a fixed rate is the most desirable of these. This means that the rate you agree to will remain the same throughout the life of the loan. With adjustable rate loans, the credit company can change it at any time over the course of the loan. The rate will be driven by the PLR (prime lending rate) and could go up without warning.

The most important thing to realize about home equity loans is that your home is the collateral. This means that your home is on the line and if you should default on the payment terms, the loan company could foreclose.

Since the home equity loan is a second tier loan (the second loan to use the home as collateral), this could also happen if you happened to violate the terms of the primary mortgage.

In that case, the holder of the equity loan could take care of the primary mortgage payment and then foreclose to recover their payment as well as the principal.

Home Equity Loans Resources

So before you go for a home equity loan, do your homework and look around a bit. Check out terms, rates and fees, making certain that you understand the home equity loans FAQ. Be certain that you understand all there is to understand before signing anything. Watch for extremely stringent terms that do not work in your favor.

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