Home Equity Loan

You've heard people talk about home equity in knowing voices. And you've probably seen it mentioned in the colorful ads spilling out of your Sunday paper. But what exactly is it? It's like a riddle…something you can't see, touch, or smell.

Home equity is the value of your home that exceeds the balance on your mortgage. In plain English, if your home is worth $200,000, and you have a mortgage balance of $150,000, your home equity is valued at $50,000. If your home is worth $200,000, and you've paid off your mortgage in full, your home equity is $200,000.

When you have equity in your home, the bank will lend you money. It's an asset with a measurable value. Lenders are happy to accept it as a security deposit against your debt.

In return for lending you all that money, the bank takes an ownership stake in your home. But-and this is important-that stake is limited to the amount of money you actually owe them. When your house is worth more than what you owe, the excess value belongs to you, free and clear. That amount will vary, though, because home values and loan balances change over time. If the home's value drops, your equity goes down. If it increases, your equity accompanies it into higher levels.