By Donna Allison on December 7, 2010
.jpg.aspx?width=75&height=75) Has your house decreased in value, as foreclosure on other homes in your neighborhood has taken place? A home equity loan, or what may be called a second mortgage, may be a good option for you. You put your house up as a guarantee that you will repay your debt, or as what is called “collateral.” This means that you are committed to repaying the money you borrow. If you don't repay the debt, the lender can sell your house to receive payment on your debt. A home equity loan is also called a line of credit. Equity is the difference between how much the home is worth, and how much you owe on the mortgage.
Many homes have lost equity rather than gained it in recent years. Instead of increasing, the value of the house decreased after the home was purchased.
Suppose you buy a house for $200,000. You make a down payment of $20,000 and borrow $180,000. You pay $15,000 of your mortgage debt. As home prices fall and homes in your neighborhood go into foreclosure, your home's value drops by 30 percent, or $54,000, to $126,000. Because the value of your home is less than the amount you owe, you have $40,000 in negative equity.
A home equity loan (or line of credit) is a second mortgage that allows you to borrow, for example, the $40,000 that you owe in this case, and offer your house as collateral if you do not repay the $40,000. Then you can spend it on home improvements that allow you to increase the value of your home, consolidate your debts, or pay for college education and other expenses, If your home increases in value, and you are able to pay a higher mortgage payment, you can also obtain a home equity loan, and probably more easily.
Home equity loans are sometimes referred to as second mortgages, because they are secured by your property, just like the original, or primary, mortgage. They are usually repaid in a shorter time period than first mortgages. Mortgages are usually set up to be repaid over 30 years. Equity loans often have a repayment period of 15 years. You can pay off your loan more quickly, but keep in mind that home equity loans increase your mortgage indebtedness and deplete the value of your home.
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