Home Equity Loans - Overview

Home equity is the difference between the amount you owe on your mortgage and the appraised (fair market) value of your home. Home equity loans and home equity lines of credit allow you to borrow money using the accumulated equity in your home as collateral. Depending on your particular financial goals and what you are using the money for, this can be an extremely sound financial step. However, if you misuse this facility by using the money to make speculative investments for example, you could end up putting your home at risk.

• Types of home equity loans
• Questions to ask when shopping for home equity loans

Home Equity Loans - Why they are Popular

Using home equity as collateral for borrowing has exploded in popularity and this is only expected to continue. The two main drivers of this are low interest rates and tax deductibility. Federal tax changes in the late '80s eliminated most personal deductions but left interest deductions in place for mortgages and for home equity loans. As a result, the home equity loan became a way for consumers to purchase the things they wanted and still be able to receive some sort of tax benefit.

This tax benefit coupled with a low interest rate environment and rising real-estate prices has led to the surge in popularity of these lending instruments. Although home equity loans typically have higher interest rates than first mortgages, when compared to the rates of personal credit cards, the advantage is readily apparent.

Lenders are inclined to view home equity loans favorably because they are well secured with collateral (the equity in your home) and typically have extremely low default rates. Most home equity loan borrowers are middle-aged, have families, stable jobs, and are extremely consistent at paying back their loans. After all, no one wants to lose their home.

According to the Consumer Banker's Association, the average home equity customer is 35 to 49 years old with a household income of $83,998, followed by 50 to 64 year-olds. Most have held the same job and owned their home for about eight years. About 2 percent default on their loans.

See what types of home equity loans are right for you.