Home Equity Loan - What Is It?

If you own a home then you've probably heard the term, home equity loan, or home equity line of credit, but perhaps you really don't understand the meaning. No problem, you're certainly not alone.

Financial terms like home equity, second mortgage, or 125% equity loan can be challenging. So, here's a quick explanation on equity and how it applies to you.

Basically, equity is the value of something you own, like a car or home, minus what you still owe on it. Think of it as what you can put in your wallet after you sold the item and paid off the loan.

Here's a quick visual example. Let's say you own your home and it's currently worth $175,000. You have a loan balance, or mortgage balance, of $100,000. The equity in your home would be $75,000.

Of course, with every payment you make on the mortgage, the less you owe on the loan, and the more equity you'll build up.

This sounds great, but remember, in the beginning you'll always be paying more in interest charges than on the principal balance.

It's only later that you'll really begin building up equity in your home. Of course, if housing values continue to rise you'll build up equity that way too.

The worst example of equity is with a new car. Because of how quickly they depreciate, cars rarely have any equity value after the loan is paid.

So, when you hear someone talking about a home equity loan, you'll now have a better understanding of what they're talking about.