Today, as house prices continue to rise, many homeowners are finding they have built up considerable equity in their homes – equity they can access through a home equity loan.

A home equity loan allows a homeowner to borrow against the equity in their house. This recovered money can then be use to finance a large purchase; a significant remodeling project; consolidate debt; or cover other large expenditures. Interest is calculated at a fixed rate and the loan is repaid monthly over a fixed period of time.

Let’s assume you purchased a home for $150,000 with $15,000 down and the home is now worth $200,000. What that means is your equity – the amount of money that remains after the mortgage is paid – has increased from just $15,000 to $65,000. That $65,000 is equity you can borrow to use as you please. However, if you obtain an equity loan of $65,000, you will now owe an addition $65,000 on your home and you will most likely be making higher monthly mortgage payments.
(See below for more information.)

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Tapping into the equity that has built up in your home is a convenient and when compared to the cost of a personal loan, an inexpensive way to access money that is yours to begin with. Many homeowners use the money to finance a home improvement project that will ultimately increase the value of their home. Other people use their equity to consolidate their debt and pay off high-interest loans and credit cards that are costing them dearly in interest payments each month.

Another option for accessing your home’s equity is a home equity line of credit – a form of revolving credit that uses your home as collateral. Homeowners apply for a line of credit against their home’s equity and are approved for an amount they can borrow up to at any time using a credit card or checks. There is no charge to establish the line of credit and homeowners can borrow or pay back the line of credit as they wish. Interest is charged only when money is borrowed.

Applying for a home equity loan or a line of credit is similar to applying for a mortgage or loan and generally takes between 10 and 15 days for approval. Most lending institutions will appraise your home and run a credit check to make sure you are capable of paying off the loan. Although banks will charge closing costs, the majority will wave fees and even offer incentives like air mile points. Negotiate to see what institution offers the best deal.