A home equity loan is a mortgage loan that converts your property’s equity into cash. The home equity loan is usually a second mortgage loan, whose lien is recorded after an existing first mortgage loan.
For example, Adam’s home is worth $200,000. He currently has a mortgage of $120,000; this means that he has available equity of $80,000 ($200,000 – $120,000). If Adam is qualified, he can obtain a home equity loan of up to $80,000.
Most home equity loans are limited to 10-year, 15-year or 20-year terms. Interest rates on home equity loans tend to be higher than standard first mortgage loans, because home equity loans tend to be riskier for the lender. In the case of a default and foreclosure, the auction funds first go to pay off the first mortgage loan and all applicable legal, administrative, tax and court fees. Only the surplus will then be applied to paying off the second mortgage.