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A home equity loan is a loan that is based on the available equity in your real estate property. A home equity loan is also known as a second mortgage.
Home equity loans are secured by your property, just like your original mortgage. The lender has a junior lien on your property.
There are significant benefits to obtaining a home equity loan. The interest rate from a home equity is significantly lower than most other unsecured loan such as credit cards or personal loans. In addition, the interest you pay on the loan is usually tax-deductible. The interest rate in a home equity loan is typically fixed.
Built-up equity in your home is the difference between the amounts your home could be sold for and the amount that any of your creditors have claims on. This amount is offered as the collateral to secure your home equity loan. For example, let's say you bought your home for $100,000 with a 20 percent down payment of $20,000. You then took a first mortgage to pay the remaining $80,000. Over the next few years, your mortgage payments are applied towards the principal amount and interest costs. Let's say you've paid $10,000 toward the principal. At the same time, market demand on homes in your area has pushed up the price on your property, and your home is now worth $120,000. This means that your equity in the property now is $50,000 - your beginning equity of $20,000 plus the principal paid up of $10,000 and the increase in your property value of $20,000. You can tap into equity for a lower cost of borrowing.
Most people use a home equity loan for major projects such as home improvement, paying college tuition, or even as a down payment for a second property.