FAQs About Home Equity Mortgages

Home equity mortgages are useful financial options for homeowners seeking the funds to improve their residence, pay down debt or to fund expenditures that do not depreciate quickly. It is not recommended to consider such a loan to purchase luxury items. These FAQs about home equity mortgages are sure to help any homeowner decide if a loan of this type is the best option.

Q: What is a home equity mortgage?

A: A mortgage is a loan given to help buy a home, while a home equity loan is a second mortgage that lends money to homeowners to use toward other purchases or expenditures. A home equity loan uses the portion of a home the purchaser has already paid off as collateral.

Q: How much is a homeowner allowed to borrow?

A: The average maximum amount of a home equity loan is the difference remaining when the mortgage amount is subtracted from 80 percent of the total value of the home. This number is known as loan-to-value, and while the standard is 80 percents some banks may lend as much as 125 percent. Loans above the 80 percent threshold are much more costly for a homeowner to repay due to the increased risk the bank takes by issuing the loan.

Q: What are common advantages and disadvantages of home equity loans?

A: Home equity loans have lower interest rates over other lending methods by as much as 10 percent, and interest paid on home equity loans that does not exceed $100,000 is tax deductible. The most apparent disadvantage of this type of loan is that it is a second mortgage and does place your home at risk of foreclosure should you default.

Q: What is the difference between a home equity loan and a line of credit?

A: Home equity loans pay the borrower a lump sum of money at one time and have an established repayment schedule, while lines of credit allow the homeowner to borrow varying amounts against home equity with a flexible repayment system. Though lines of credit are home equity loan methods appealing to many homeowners, it is important to pay any borrowed funds back in a timely manner since failure to do so results in a large balloon payment that is detrimental to the financial security of the borrower.