Categories: Mortgage and Housing

How do Home Equity Loans Work?

How do home equity loans work? The simplest way of putting it would be to define it as the difference between what you owe on your home (including mortgage payments and any outstanding maintenance or repair costs) and how much you can borrow through a loan.

In other words, what you owe is the number that determines how much you can borrow against it. In simple terms, a home equity loan is simply a second mortgage.

How do Home Equity Loans Work?

Most people have been taught in their financial planning courses that a home equity loan is very risky. Why? If interest rates were to drop to zero overnight suddenly, homeowners would be sunk without any collateral behind them. While this situation sounds dramatic, it’s a common occurrence. If you follow news about the stock market, you’ll likely hear a lot of analysts warn that the stock market may suffer a “Dump” during the next few weeks.

Risks Involved

The truth is that a home equity loan does not need to be treated like a risky investment. However, those risks are much lower than if you didn’t take out a home equity loan. For example, to increase your home’s value and increase its marketability, you can use an existing structure or home equity lines of credit—both of these types of financing offer low-interest rates and long terms.

How does it Work?

The risk/reward ratio is one of the most critical factors determining your monthly payment amount. Home equity loans are not loans but a revolving line of credit. As such, your monthly payment can either go up or down depending on how good or bad the economy is.

Credit History

A home equity loan is available to everyone, whether you have a good credit history or not. It’s also easy to qualify for a home equity loan since it doesn’t require a security deposit. The good thing about this type of home equity loan is that you don’t have to have a co-borrower sign for the loan. You can borrow against your credit and asset (in case of default).

Credit Limit

How do home equity loans work? A home equity loan is used when you don’t have enough money to finance your new purchase, but you still want to have extra cash. Your existing home serves as collateral, so you don’t need to worry about losing your house. When you sign for a home equity loan, you agree to pay monthly payments based on your home’s credit and equity value. As mentioned above, this equity is not taxable, so it’s tax-free. However, you have to pay tax on any amount over the credit limit.


There are many types of home equity loans available in the market today. They come with different interest rates, payback dates, and terms. Before you sign up for a home equity loan, make sure to check your credit history and financial condition. To determine your eligibility for a home equity loan, you have to consider your credit score, length of employment, and the value of your home. In general, a home equity loan is the right choice if you plan to keep living in your home. However, it’s not the right choice for people who don’t have a steady income and bad credit.


To learn more about applying for a home equity loan, contact a licensed mortgage broker. Many brokers will offer you a loan without charging a fee. They will help you find the best loan possible for your specific situation.

Mike Liaison

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