What is Home Equity Borrowing?

Home equity borrowing is a method by which homeowners are able to get a significant loan from lenders by providing their home as collateral. The homeowners are responsible for paying back the loan along with interest, or they run the risk of losing their home to foreclosure. With a home equity loan, borrowers usually receive a lump sum of cash that is based on the worth of their home and the amount of equity they have in the home. Other forms of home equity borrowing are home equity lines of credit, in which the borrower receives credit that he or she can use daily, or reverse mortgages, which allow people to borrow directly from the home equity they have built up over time.

Borrowing money is a common occurrence for individuals in modern society, as it allows people to accomplish tasks like paying bills, starting businesses, or anything else that requires a quick influx of cash. These loans can be difficult to obtain if the borrower doesn't have some significant form of collateral to offer to the lender as security. Home equity borrowing solves this problem for homeowners, as they can use their home as collateral for several types of substantial loans.

The obvious drawback to home equity borrowing is that the borrower could fail to pay the loan back in the required time. Should that occur, the lender has the right to foreclose on the home, in which case the homeowner would lose his or her residence. Anyone wishing to borrow in such a manner should have a plan in place to pay the loan back. Borrowers should also be aware not only of the loan's principal amount, which is the amount originally borrowed, but also of the interest due over the course of the loan.

Most home equity loans come with relatively low interest rates, because lenders know that they have the house as collateral. In some cases, though, interest rates can be variable on a home equity loan, meaning that they could conceivably surge on the borrower from the original rate. The amount of principal that a borrower may secure is usually determined by how much money he or she has paid on the original mortgage and what value the house currently holds. Borrowers should also be aware that the amount owed to the lender doesn't change even if the home's value decreases.

There are other methods of home equity borrowing besides lump-sum loans. A borrower can receive a line of credit from a lender by using his or her home as collateral. Borrowers can write checks from these lines of credit for daily use, but they must eventually repay whatever they take out and are usually restricted from going over a certain amount. Reverse mortgages, often used by retirees with limited income, allow borrowers to essentially trade in home equity for cash payments of some sort.