A "home equity loan" allows someone to borrow money and use the equity in the home to secure the repayment of the loan. Equity is the appraised value of the home minus any principle amount still owed on the mortgage.
For example:

• Appraised value of the house = $200,000
  
• Unpaid mortgage principle = $150,000; then
  
• Homeowner's equity = $ 50,000

Depending on creditworthiness (income, assets, credit rating, etc.) and the amount of outstanding debt, home equity lenders may let a homeowner borrow up to 85% of the appraised value of the home less the amount owed on any first mortgage.

The length of the loan and the loan terms may vary. Homeowners should ask:

• If the lender requires the borrower to withdraw a minimum amount of money when the equity account is opened;
  
• If there are limits on the amounts the homeowner may withdraw after the account is opened;
  
• How the homeowner withdraws money (checks, credit cards, or both);
  
• If there is a time limit for the homeowner to withdraw money;
  
  • A home equity plan may sets a fixed time -- a draw period -- when withdrawals can be made from the account. After the draw period expires, the homeowner may be required to renew or refinance the credit line in order to borrow additional money.
• If the balance has to be paid in full or can be paid over a fixed time.

Interest Rates for Home Equity Loans

• Shop around for the lowest rate combined with the best loan terms. The annual percentage rate (APR) indicates the cost of credit on a yearly basis. The advertised APR for home equity loan is based on interest alone. For a true comparison of credit costs, borrowers should consider all other charges, such as points and closing costs, which add to the cost of the loan. For a traditional installment (or second) mortgage, the advertised APR often includes the total credit costs for the loan.
  
• Different types of interest rates may be offered. Many home equity loans have variable interest rates. These may offer lower monthly payments at first, but the interest rate may increase during the life of the loan and increase the required payments and total costs. Fixed interest rates, if available, may start slightly higher than variable rates, but they offer stable monthly payments and predictable costs over the life of the loan.
  
• Variable rate loans will require the interest rate to be recalculated on a periodic basis, such as every six months or every year.
  
• Variable rates typically have an periodic cap, the upper limit for the interest rate each time it changes. There is also an upper lifetime cap, the upper limit for the interest rate for the life of the loan. With variable rates, lenders use an index (such as the prime rate) to determine each change in interest rates. The rate is usually determined by adding the index rate to the margin, a fixed amount stated in the terms of the loan. For example, if the loan terms specify a variable interest rate of "Prime plus two percent," two percent is the margin. Sometimes, variable rate loans can be converted to a fixed rate at some future time.

Closing costs

A home equity loan requires the homeowner to pay many of the same costs that are charged for a conventional mortgage loan.

These costs may include:

• An application fee
  
• A credit report
  
• A title search
  
• An appraisal
  
• A flood search
  
  • If the property is in a flood zone, the lender may require flood insurance.
• Attorneys' fees
  
  • Points
    
    • A "point" is 1% of the loan amount. For example, on a $150,000 loan with two points, the borrower must pay $3,000 to get the loan.