EQUITY
LOAN
A
home equity loan or line of credit allows you to borrow money, using your home's
equity as collateral.A home equity loan (or line of credit)
is a second mortgage that lets you turn equity into cash, allowing you to spend
it on home improvements, debt consolidation, college education or other expenses.
Second
Mortgages
There are two types of home equity debt: home equity loans and home equity lines
of credit, also known as HELOCs. Both are sometimes referred to as second mortgages,
because they are secured by your property, just like the original, or primary,
mortgage.Home equity loans and lines of credit usually are repaid in a shorter
period than first mortgages. Most commonly, mortgages are set up to be repaid
over 30 years. Equity loans and lines of credit often have a repayment period
of 15 years, although it might be as short as five and as long as 30 years.
Home Equity
Home
equity is the value of a homeowner's unencumbered interest in their property,
that is to say the difference between the home's fair market value and the unpaid
balance of the mortgage and any outstanding debt over the home. Equity increases
as the mortgage is paid or as the property enjoys appreciation. This is sometimes
called real property value in economics.
Technically,
home equity has a zero rate of return and is not liquid. Home equity management
is the process of using a equity extraction via loans, at favorable and often
tax favored interest rates, to invest otherwise idle value in higher yield (after
tax), liquid, safe, way to create an arbitrage. Arbitrage is in essence borrowing
money at one rate and earning a higher rate elsewhere. Note that home equity
management actually reduces home equity, so that safety and liquidity are essential
to preserving nominal home equity. Thus the process excludes all equity extraction
that is actually spent or invested in non-liquid ways.(1)