How Do Home Equity Loans Work

Home equity loans are very useful financial tools if you are lucky enough to have equity in your current property and are in need of some extra cash. Home equity loans are sometimes referred to as house improvement loans and equity loans.

When applying for home equity loans, it is smart to understand how a home equity loan works to ensure you do not put your current home at risk. The loan provider will use the total of your house’s equity to identify the possible amount you can obtain for your home equity loan.

Usually, a lending institution will base your allowable home equity loan on a portion of your house's equity. Conventional loan providers will limit your home equity loan to 80 % of the house’s equity.

If you are considering getting a home equity loan, you can choose between a fixed-rate loan or a home equity line of credit. With a house equity credit line loan, you will be allowed to pull money from the account as you see fit. You will just be required to pay interest on the amount of the home equity loan that you are using/borrowing at any particular time.

I’m sure you’re curious about the interest rate on these loans. Lenders usually base the rates on their home equity loans on their Prime Interest Rate, the interest rate they charge their most qualified clients or borrowers. We recommend going to the lender’s website or speaking with them directly to get an idea of their latest rates and product offerings.

Now that you know how a home equity loan functions, you’ll need to decide if now is the right time to take advantage of the equity in your property. Lenders tend to have confidence in providing these types of loans due to the fact that the market value for most properties over time has continuously risen. As a friendly reminder, most lenders are more than happy to let you borrow a large amount of money which might seem great in the short-term, however, if you are somehow unable to pay back your obligations this could also mean the loss of your home!