Home Equity Loan Definition

What is a home equity loan?

1 Answer

A home equity loan is a loan secured by real property you own, such as your primary residence.

There are two popular types of home equity loans available for borrowers to choose from. They are what is commonly known as a "fixed loan" or a HELOC ( Home Equity Line of Credit) which usually are offered with a "variable", or adjustable rate, often tied to an index such as the prime rate.

Fixed rate home equity loans are usually best for a borrower needing a lump sum and to be repaid at a fixed payment & rate over a certain period of time ranging from 5-30 years. They offer the security of knowing the payment and rate will not change.

HELOC's are almost always a variable rate loan, and work much like a credit card secured by the equity in your home. Borrowers may access the credit line over and over and write checks or use an ATM card to access the credit line. Monthly payments are commonly based on an interest only amount. The most common setup for this type of loan is for a draw period of 5-10 years followed by a repayment period of up to 20 years during which principal must also be repaid.

Many lenders offer various "options" with these type of loans such as allowing for " rate locks" on different balances within the line.

One additonal advantage for this type of loan is that they can usually be obtained for little to no cost.

Interest paid on a home equity loan may be tax deductible as is interest on most other types of mortgages, consult with a tax advisor for your personal situation.