What is a Home Equity Loan ?

What is a Home Equity Loan ?

Want to know what a home-equity loan is? What is equity? Do you know?

Definition of a home-equity loan:::

A loan or credit line that is secured by the equity the borrower has in a home

What is equity?

The residual value of a business or property beyond any mortgage thereon and liability therein.

Example of equity

If you have a mortgage for AU$ 60,000 and your home is worth AU$ 70,000 then you have equity of AU$10,000

Example of negative equity

If you have a mortgage for AU$ 100,000 and your home is worth AU$ 90,000 then you have equity of AU$ - 10,000 - which is negative equity.

This means you owe more on your home than it is worth.

What are the implications of taking out a loan to get at equity?

A mortgage equity withdrawal means you have more money to spend. If you want to do the house up, buy a new car or holiday home then it is one way of borrowing the money. However the loan is secured on your home as it is a mortgage.

The dangers lie if you can not afford the increased payments required to pay off the loan. Also if house prices fall then it is possible to get into negative equity. If you have taken out additional loans on the value of your home at the peak of a housing price boom then it is possible that prices will slide and perhaps take many years to recover.

Always remember than loans secured on your home mean that your home is at risk if you do not keep up repayments.

Mortgage equity withdrawal is sometimes reffered to as MEW

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