A home equity loan, or a home equity line of credit, is a kind of home loan that allows you to borrow an amount of money, using your home's equity as collateral.
The "equity" in your home refers to the difference between the current value of your home and the current home loan debt, which is still outstanding. If you bought your home a few years ago, there may be quite a bit of equity in your home. But to get your hands on that equity, without selling the home, you would have to take out a home equity loan, or a home equity line of credit.
"Collateral" is simply the "guarantee" you offer the lender, to reduce the risk of not repaying the loan. If you don't repay the debt, the lender can take your collateral and sell it, to get the money back. With a home equity loan, or home equity line of credit, you pledge your home as collateral. So, if you don't repay home equity loan, you could lose the home and be forced to move out.
An example:
If you bought a R200 000 home, just two years ago, with a 10% deposit (R20 000), and a R180 000 home loan, there would have been R20 000 worth of equity in the home, from day one. But with property values that have boomed so drastically over the past few years, there would probably be a whole lot more equity in the home today.
If we assume that the property value had increased only 10% per year (20% to 30% is closer to the true price increase for most South African properties), your house would have gained R42 000 (R20 000 + R22 000) in equity. This means that there is actually R62 000 worth of equity in the home!
Actually, the equity might be slightly more, because you would have paid your home loan repayments diligently. The amount of the principle home loan amount you were able to repay should also be added to the home equity.
Home equity loan
A home equity loan, or a home equity line of credit, is a second mortgage, which lets you turn your home equity into cash. You can then typically spend the cash from your home equity on things like home improvements, interior decorating or debt consolidation, or keep the home equity line of credit as a safety fund for unforeseen emergency expenses.
