What Is A Home Equity Loan & How Is It Calculated?

A home equity loan is a type of loan which uses your home as collateral, to get a loan. It is just like co-signing when getting a credit from any institution. The actual part that you own is the home equity, and this is what gives you the loan. Your current home equity value is calculated by taking the value of the home and subtracting the mortgage value. IE: If the value of your home is $300,000 and the mortgage value is $100,000, you have a total of $200,000 equity in your home. This $200,000 will allow you to get a loan, by keeping this 200K as a security for the loan. This type of loan is often called a second mortgage, and this in fact reduces your equity in your home. The biggest risk is this; since your home is put up as a security towards your loan, if you default on the payments you may lose your home.

How Much Can Be Loaned From A Home Equity Loan?

Usually, loan lenders will allow someone to borrow up to 80% of their home equity loan value. This is known as the loan to value (LTV) ratio, in this case it is 80%. The loan to value ratio is calculated by taking the amount borrowed divided by the value of the home. IE: If your home is valued at 100K, and your mortgage value is 60K, your loan to value ratio is 60%, but if you borrow 20K, the loan to value ratio will rise to 80%. Loan lenders will sometimes allow you to reach a loan to value ratio of 90% or even 125%, but they come with a higher risk.

5 Comments »

1. 

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   Home Equity Loans Basics | MortgageTonight.Com…

   Outlined in this article are the basics of Home Equity Loans, to learn more please visit daily as we will be posting more information on mortgage loans, home equity, mortgage insurance and anything related to mortgages and debt consolidation….

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3. 

   thanks for the informative post, will come back for part II

   Comment by Elizabeth — December 26, 2008 @ 7:09 pm

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