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Home >> Lending >> Home Equity
Home Equity vs. Home Loan
When a person taps into their home's equity, isn't it the same as taking a home equity loan? If someone were to use their home's equity to remodel their home, how would they go about repaying what they use? What is the difference between a home's equity and a home equity loan?
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 A home's equity is basically the value of the home in today's market, minus the amount of money owed on it, so a $100,000 home with a $40,000 mortgage has $60,000 in equity. An equity loan is based on the figure above, but this doesn't necessarily mean you can borrow $60,000. If the bank or lender restricts your equity loan amount to 80% of the value, then $100,000 times 80% is $80,000, minus the $40,000 loan, leaves $40,000 available for an equity loan. This 80% is used to allow for reasonable costs if the lender had to take the home and sell it, if you didn't repay them. It also allows for a decline in value, as some areas are seeing now.
A home equity loan can be used to add to the home, which can increase its value even more. Your lender can allow for this when he calculates the value of the home. There are separate home improvement loans, home equity loans and home equity lines of credit. These may be used to improve the home on a one-time basis, for any purpose you want on a one-time basis, or for any purpose you want on a revolving basis like a credit card. The line of credit is drawn on, repaid, drawn on, repaid, etc.
Published on BankingQuestions.com 11/27/07
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