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Home Equity Loans Defined
Before you can understand what home equity
loans are, you must first know what equity is.
According to the United Federal Reserve Board,
equity is the difference between the fair market value (appraised
value) of the home and the outstanding mortgage balance. So
if your current mortgage balance is $50,000, and your house
is appraised at $100,000, you have $50,000 in equity.
Financially, equity in a home represents the portion of a
home owned by a individual. When the house is sold the money
is given to the homeowner to do with as they please.
A home equity loan is a creative type of loan backed by the
amount of equity a person has in their home. These types of
loans are sometimes called second mortgages or reverse mortgages
and are very common. It is important to understand that when
a home equity loan is taken out on a property, the amount
that is borrowed against no longer belongs to the individual.
It belongs to the lender who has "loaned" you back
your equity.
Home equity loans can be taken out from either the bank
that provided the mortgage or by another financial institution.
It is important to know that defaulting on either payment
can result in foreclosure. Therefore, be sure that you completely
understand the terms of your home equity loan.
Some of the many uses of a home equity loan are presented
on our article on home
equity loans uses.
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