Home Equity Loans

  • A home equity loan is a type of loan where the borrower uses his or her home equity as collateral for the loan. The house is often the most valuable asset, so often home equity loans are used primarily for large purchases, such as education or home improvements.
  • Home equity is calculated based on how much of the mortgage is paid off and the value of the home.
  • Lenders typically lend about 75% of a home’s equity, but they will also look at the individual’s ability to repay the loan.  The length of a home equity loan, called the “draw period” usually lasts between 10 and 25 years.  After this time, you may be able to renew your credit line if your plan allows for it.
  • Home equity loans can be good for people who are not sure how long they will be staying in their homes, and for people with other financial investments who do not want to disturb them right away. 
  • There are two types of home equity loans:
    • Home equity line of credit: You can borrow a certain amount for the life of a loan, and as you pay off the principal, the credit revolves and you can use it again.
    • Home equity loan: You receive the loan in a lump sum, and the loan is paid off over a fixed time with a fixed interest rate and the same amount paid each month.
  • An advantage to home equity loans is that once an individual qualifies, they can get money relatively quickly. In addition, with a line of credit, one only pays interest on what is borrowed, and because the loan is paid for from income, home equity does not decrease.  In addition, for people with chronic health problems, a conventional home equity loan can be a good option, due to the short-term cash flow.
  • There are several disadvantages to home equity loans, including relative difficulty to qualify, you must make monthly payments at the risk of losing your home, and there may be no option for renewal.  There may also be limitations on how the line can be used (for example: you may have to borrow a certain amount each time, or maintain a certain amount outstanding.)  **It is important to remember that home equity loans are NOT a quick fix, and they are not the best option for everyone. To find out more information, check out WISER’s fact sheet: Home Equity Loans- Borrower Beware!

Here is a checklist from The Federal Reserve that may be helpful when speaking with your lender about different home equity plans:

Home Equity Plan Checklist

 Basic Features
Plan A Plan B
 Fixed annual percentage rate %
 Variable annual percentage rate  %  %
  •  Index used and current value
 %  %
  •  Amount of margin
  •  Frequency of rate adjustments
  •  Amount/length of discount (if any)
  •  Interest-rate cap and floor

 Length of plan
       Draw period 

       Repayment period
 Initial Fees
       Appraisal fee
       Application fee
       Up-front charges, including points
       Closing costs    
 Repayment Terms
 During the draw period
       Interest and principal payments
       Interest only payments
       Fully amortizing payments
 When the draw period ends
Balloon payment?
       Renewal available?
       Refinancing ofbalance by lender?
Source: “What You Should Know about Home Equity Lines of Credit,” The Federal Reserve Board.

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