Equity Mortgage Loans

A home equity loan allows the homeowner to tap into the equity they have built in their home and turn that equity into cash. Equity is calculated by appraising the current value of the home, and then subtracting the amount that is still due on the loan. There are two primary ways to build equity in your home. The first way is by actively paying down the principal of the mortgage. The money that you invest to reduce the total principal of the loan translates into equity. In most cases, you will pay principal and interest on the mortgage every month for the life of the loan. Therefore, the longer you have had your mortgage, the more equity you will have in your home.

The second way to build equity is passive – in real estate markets that have appreciated, the value of your home could exceed the amount you owe on the loan. If you purchase a home today for $200,000 and it is appraised two years later at $300,000, you have passively gained $100,000 in equity. Passive gains are like the stock market, they fluctuate depending on the current value of your home.

Get Started
Figure Image
Figure Image

How an Equity Mortgage Loan works

A home equity loan is sometimes referred to as a second mortgage. With a home equity mortgage, the borrower receives a lump sum of money upfront and will make a monthly payment of principal and interest to repay the loan. The homeowner can usually borrow up to 85% of the total equity accumulated in the loan. The home equity loan is different than a HELOC (home equity line of credit). With a HELOC, the borrower has access to a line of credit that they can draw down from. They do not owe interest on the amount that is available, they only owe interest on the amount they have borrowed. Homeowners will often take out a home equity mortgage when they refinance with a lower interest rate, especially if they have a large amount of equity in their home.

Key Features of an Equity Mortgage Loan

  • These loans will typically have a fixed interest rate that stays constant through the life of the loan.
  • The loan is offered for a shorter time period than a traditional mortgage, usually between five and 15 years.
  • The monthly interest on an equity mortgage loan is tax deductible.
  • The home equity loan must be paid off with or before the sale of the house.
  • There is no restriction on how the money you receive must be spent.

Figure Image