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A home equity loan is a loan that allows you to borrow against the equity of your home. More specifically, your home acts as collateral for your loan.

If you are thinking about applying for a home equity loan, understanding what collateral is and how equity loans work is very important.

What is collateral?
Collateral is personal property that you promise as a guarantee that you will pay back a debt or loan. If you fail to repay your debt, the loan provider will take, or repossess the property you have used as collateral. They will then sell the collateral so that they can get the money back from the debt you did not pay. You use your house as collateral with a home equity loan or line of credit. Therefore, if you do not pay your equity loan, you will lose your home. Learn tips on how to avoid foreclosure.

What is equity?
The equity of your home is the difference between how much you owe on your mortgage and what the value of your home is.

Below is an example of determining equity:

Suppose you purchase a house for $300,000. You make a down payment of $30,000 and borrow $270,000. The day you close on your new home, the equity is the same as the down payment -- $30,000: $300,000 (home's purchase price) - $270,000 (amount owed) = $30,000 (equity).

Skip to five years later. As a result of regular monthly mortgage payments, you have paid down your mortgage debt by $18,000, so you now owe $252,000. During these five years, the value of your home has also increased, now being worth $400,000. The equity of your home is now $148,000: $400,000 (home's current appraised value) - $252,000 (amount owed) = $148,000 (equity)

1. House purchase price: $300,000
Amount borrowed: -$270,000
Down payment/equity: $30,000
2. Five years later
Amount borrowed:
Principal paid: $18,000
Amount owed: $252,000
3. House's appraised value: $400,00
Amount owed: -$252,000
Equity $148,000

What is a home equity loan?
An equity loan, or line of credit is a second mortgage that allows you to turn the equity of your home into cash. Equity loans can be used for anything. Some of the more popular loan purpose are for consolidating debt, home improvements and college tuition. Learn more reasons why people borrow against the equity from their homes.

The loan terms for an home equity loans or lines of credit are typically shorter than first mortgages. Loan terms for first mortgages are typically 30 years. Whereas equity loans range from 5 - 15 years. However, Star Loan Services offers home equity loans for as long as 30 years.

Learn more about the home equity loan types we offer.


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