What Is a Home Equity Loan?

Posted on January 9, 2017

What Is a Home Equity Loan?

What Is a Home Equity Loan?

Like lots of folks, you may have some big expenses on the horizon this year:


  • An upcoming wedding?

  • An outdated kitchen to remodel?

  • Outstanding debt to pay off?

  • A long-overdue vacation?


So, how will you pay for everything?


If you’re a homeowner, one option you may have heard about is a home equity loan. Also known as a “second mortgage,” it’s a very simple method that lots of people choose for financing a wide variety of common expenses.


Let’s talk about what we mean by “equity in a home” and how it can benefit you.

What Is Home Equity?

Home equity is the difference between the current value of your home and the amount you still owe on your mortgage.


As an example, suppose you purchased a home 5 years ago for $200,000.


  • You made a down payment of $20,000 and financed the remaining $180,000.


  • So far, you’ve paid off $13,000 on the mortgage.


  • $20,000 + $13,000 = $33,000

    • That’s the total amount you’ve already paid.


  • $200,000 - $33,000 = $167,000

    • That’s the amount you still owe.


Now let’s say that, 5 years later, the value of the home has increased to $250,000.


  • To determine your home equity, we will subtract the amount you still owe from the current value of your home:


  • $250,000 - $167,000 = $83,000


  • This means you currently have $83,000 worth of equity in your home.

How Does a Home Equity Loan Work?

A home equity loan is a one-time lump sum that you can borrow against the equity in your home. Several factors determine whether you qualify and how much you can borrow:


  • The amount of equity in your home


  • Most home equity loans are for no more than 85% of current equity.

  • To use the example above, if you currently have $83,000 of equity in your home, your home equity loan would typically be $70,550 or less.


  • Your current income


  • Your credit score

How Do You Pay Off a Home Equity Loan?

A home equity loan works a lot like a mortgage -- you make regular monthly payments over a predetermined length of time.


  • Most home equity loans are paid off in 15 years, but the life of your loan could range from as little as 5 to as long as 30 years.


  • The amount of the loan, your income, and your credit score will affect your interest rate.


  • Also like a mortgage, a home equity loan involves closing costs that you will pay up front:


  • Appraisal fees

  • Originator fees

  • Title fees

  • Other closing fees

How Can You Get a Home Equity Loan?

Should you apply for a home equity loan?


If you have any large expenses to take care of -- from home improvements to college tuition to a family vacation -- a home equity loan may be a good fit for you.


BluCurrent Credit Union offers quick approval on home equity loans with flexible terms and low, variable interest rates.


If you’re ready to get started, apply today! We look forward to providing information on home equity loans and helping you get the financing you need!