A home equity loan is a loan for the difference between the market value of a house and the amount of principal that is left in a current mortgage.
For example, if a house is worth $100,000 and a person has a mortgage balance of $40,000, he has $60,000 of home equity.
The percentage of the total market value that can be granted in a loan depends on where a person lives, his credit rating, and a number of other factors. In essense, taking out a home equity loan is taking on a 2nd second mortgage. In such a case, a person's home is used as collateral in an equity loan. Thus it is very important to stay on top of payments, never making any late payments, and to avoid taking out a loan that cannot be afforded.
Uses for Home Equity Loans
When a person receives a home equity loan, he will have a good amount of money to put towards other needs. Normally people use these loans to pay for college, cover medical bills, or to consolidate other high-interest debt. Often people take the equity of a home and invest it in another property.
Using the Money Back on the Property
Getting a home equity loan can give a home owner the opportunity to make improvements on the house itself. This money can be used to make additions to the house, put in a pool, fix a kitchen, put in new floors or landscaping. The money can also go towards enhancements that need to be made before a house is put up for sale. In this way, by taking money out of your investment, you can actually take steps to enhance that investment.