Home equity loans are loans that homeowners can take out, using their home as collateral. Specifically, you can borrow the equity you have accrued in your home. Your equity can be calculated by subtracting the amount you currently owe on your mortgage loan from the value of your home. Home equity loans may also be referred to as a second mortgage, a home equity installment, or simply an equity loan.

For example, suppose your home is valued at the September 2022 median home price in Nassau County of $699,000. The amount you still owe on your mortgage is $450,00. In this case, your equity is $249,000. However, with a home equity loan, you can typically only borrow up to 85% of your equity. In this case, you may be eligible to borrow up to $211,650.

Keep in mind that to qualify for a home equity loan, you'll need to have at least 15-20% equity in your home.

How a Home Equity Loan Works

If you decide to apply for a home equity loan, you'll first determine how much of the equity you'd like to borrow. Then, you will need to qualify for the loan. The lender will run your credit and will need proof of sufficient income. Your debt-to-income ratio must also meet the lender's requirements. Additional documentation may be required by the lender.

If approved for a home equity loan, you'll receive the loan in a lump sum payment. Your payments will be fixed over the life of the loan, and the interest rate will be fixed throughout the duration. You will pay your home equity loan payment, just as you pay your mortgage payment each month. Different lenders have different repayment terms (ranging from 5-30 years).

Is a Home Equity Loan the Same as a HELOC?

Home equity loans and home equity lines of credit (HELOC) are both loans that you may be able to secure using your home as collateral. However, they differ in a few key ways. A home equity loan provides you with an upfront lump sum. A home equity line of credit allows you to use the equity as you need or want, much like a credit card.  

A home equity loan has fixed payments and a fixed interest rate. If you don't use your HELOC, you won't have to make a payment. Once you begin using the line of credit,  the payments will vary, and the interest rate is variable. 

Benefits of Home Equity Loans

Home equity loans allow you to access the money you've earned by paying your monthly mortgage payments over the years. Should you need a large lump sum of money, home equity loans may be a helpful tool. Most lenders do not put restrictions on how you can spend the money. That means you may use it to update your home, finance your child's education, pay for a wedding, or take the trip of a lifetime. In most cases, you can spend the money any way you wish.

Fixed interest rates are also a benefit as you know precisely what you'll be responsible for paying each month. You may refinance your home equity loan in the future if interest rates drop.     

It's important to note some potential downsides to home equity loans. Because the loan is secured with your home, defaulting on your loan can result in losing your home to foreclosure. If you take out a loan and experience a financial emergency, you cannot borrow additional money without securing a new loan.

Is a Home Equity Loan Right for You?

Home equity loans are an option that may provide you the access to capital that you need. However, before applying for a home equity loan, consult your team of trusted advisors, including your accountant, financial advisor, wealth manager, and trust and estate attorney to learn more about the impact it may have on your overall financial standing.

Roach & Lin, P.C. is a law firm in New York City specializing in the representation of default mortgage servicers. Our legal services include foreclosure, bankruptcy, evictions, REO sales, loss Mitigation, and litigation.