Homeowners are able to borrow money against the value of their homes through the use of home equity loans.
The difference between the current market value of the home and the outstanding balance on the homeowner's mortgage is used to determine the amount of the loan.
Home equity secures the loan. The maximum amount a homeowner can borrow will be 80% to 90% of the home's appraised value.
The term of repayment for traditional home equity loans is predetermined, just like the term for conventional mortgages.
Borrower makes fixed principal and interest payments. As with any mortgage, the home could be sold to pay off the loan.
A home equity loan can help you convert home equity into cash, especially if you invest it in home renovations that increase its value.
However, keep in mind that you are putting your home at risk—if real estate values fall, you may end up owing more than your home is worth.
In the event that you decide to move, you run the risk of making a loss on the sale of the house or of not being able to move at all.
Home equity loans exploded in popularity following the Tax Reform Act of 1986 because they allowed consumers to avoid one of the act's main provisions:
The act did not eliminate one significant exemption, and that was interest on the servicing of debt based on a residence.