A home equity loan, also called a second mortgage, allows the borrower to pull equity out of their home. The loan amount is determined by the value of the property, and the value of the property is determined by an appraiser from the lending institution. The loan increases the lien on the borrower’s house and reduces the amount of equity they have in their home. There are two types of Home Equity loans: a cash out loan and a HELOC loan.
With a cash out refinance loan, the borrower can get up to 80% of the value of their home in the form of a mortgage. That money is then used to immediately pay off the remainder of their original mortgage and the borrower keeps the difference. For example, a borrower has a home worth $100,000. They still owe $70,000. In a cash out loan, the borrower would receive $80,000. $70,000 would be used to pay off the remaining mortgage and they would keep $10,000.
HELOC stand for Home Equity Line of Credit. It is a line of revolving credit and either has an adjustable or fixed rate. The credit is secured by the home itself, or the equity from the home. The line of credit is deposited in the borrowers account. They can access these funds whenever they want, however the borrower can only withdraw a specific amount each time. This is known as a draw.