Common Mortgage Types - Home Equity Loan/Home Equity Line of Credit
If you need a lump sum of money for a specific purpose, such as a home improvement project, you may be considering a home equity loan. A home equity loan allows you to borrow a fixed amount of money against the value of your home, which means your house can be used as collateral if the money isn't repaid according to the terms of the loan.
A home equity line of credit is also borrowed against the value of your home, but is a little more flexible in that you can draw on it as needed until you reach your limit. With a home equity line of credit, you're usually given checks or a credit card you can use to withdraw funds.
The advantage of home equity products is that they typically have lower interest rates than personal loans because they are secured by your house, and in most cases the interest is fully tax deductible. If they haven't already been repaid in full, both types of home equity products must be paid off when you sell your house.
The amount you can borrow for a home equity loan or line of credit is determined by the lending institution, which takes a percentage of the appraised value of your home and then subtracts the balance of your mortgage. A responsible lender will look closely at your income and other financial responsibilities to determine your ability to repay the loan so that you don't put yourself at risk of losing your home.