Renovations Bathrooms

What is a home equity loan and how does it work? Can you use it for home renovations?

We have to renovate our master bathroom but don’t completely have the funds. Someone told us this is the way to go but did not explain it very well.

A Home Equity Loan or a Home Equity Line of Credit are loans/cash advances made to a person based upon the amount of equity he/she has in the home.

The loan is collateralized by the equity in the house and the lender places a secondary lien on the house. Thus, if you do not pay the home equity loan, you can have the house foreclosed upon by the company.

While different companies have different standards, assuming a max loan-to-value of say 95%, it works sort of like this :

Say your house appraises for $200,000 (you will need a recent appraisal to get the loan). You can borrow up to the point where your primary mortgage and your secondary mortgage balances equal $190,000 (95% of the 200,000). If the balance on your first mortgage was, say, $150,000, you could borrow up to $40,000 for the home equity/HELOC ($150,000 plus $40,000 puts you at the $190,000 max – 95% LTV).

You can use the money for anything you like – renovations, a Hawaiian vacation, a new car, whatever. Since the Equity Loan is secured by your house, you usually get a lower interest rate than say a personal loan. Obviously, the major problem is that you put your house on the line should you fail to keep up with the payments on either the first mortgage or the second mortgage.

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