Understanding Home Equity and Mortgage Loans

Equity, put simply, is the amount of your home value that you own. It's the difference between the property's present market value and the outstanding loan balance and any liens. Many times people take out a loan against this equity.

Let's say your home was worth $80,000 when you bought it. You've paid off $10,000 of the loan used to buy your home, plus your house has appreciated in value $20,000. If your home now has a market value of $100,000 and an outstanding loan balance of $70,000, you'd have $30,000 in equity. Loans against equity have become increasingly popular because of several factors including: (1) steadily rising home values have increased the equity in people's homes; (2) the interest rate on loans borrowed against a home is usually lower than other forms of personal loans and; (3) the interest payments made on a home equity loan are tax deductible subject to specific limitations. Quicken Loans always suggests consulting with a tax professional to determine the applicability of any tax deduction to a borrower's individual circumstance.

Home equity loans usually come in two varieties: the traditional second mortgage and a home equity line of credit.