Before understanding the home equity loan, we have to learn home equity. Home equity is just excess of total value of home and loan taken on same home. We have used same accounting equation formula for calculating home equity.
Home Owner’s Equity = Total Value of Home – Already taken loan on Same Home
For example, a person has a home of $ 200 Million. He has already taken loan on same home of $ 100 Million. Now, excess of his value of home and his taken loan on home is $ 100. This $ 100 will be his home equity. He can use it for taking another loan. When he takes another loan on the basis of his home equity, it is called home equity loan. Suppose, same person goes to a Bank, he demands a loan of on the basis of his home equity of $ 100 Million. Bank checks the market value of home and gives him loan on 50% of home equity. It means he will get home equity loan $ 50 Million. He can use this loan for repair of same home or the terms of home equity loan.
Home Owner’s Equity = Total Value of Home – Already taken loan on Same Home
For example, a person has a home of $ 200 Million. He has already taken loan on same home of $ 100 Million. Now, excess of his value of home and his taken loan on home is $ 100. This $ 100 will be his home equity. He can use it for taking another loan. When he takes another loan on the basis of his home equity, it is called home equity loan. Suppose, same person goes to a Bank, he demands a loan of on the basis of his home equity of $ 100 Million. Bank checks the market value of home and gives him loan on 50% of home equity. It means he will get home equity loan $ 50 Million. He can use this loan for repair of same home or the terms of home equity loan.
Balance Sheet Before Home Equity Loan
Liabilities | Amount (in M.) | Assets | Amount (in M.) | ||
Mortgage on home | $ 100 | Home | $ 200 | ||
Home Equity | $ 100 | ||||
Total Liabilities | $ 200 | Total Assets | $ 200 |
Balance Sheet After Home Equity Loan
Liabilities | Amount (in M.) | Assets | Amount (in M.) | ||
Mortgage on home | $ 100 | Home | $ 200 | ||
Home Equity | $ 100 | Cash from home equity loan | $ 50 | ||
Home Equity Loan | $ 50 | ||||
Total Liabilities | $ 250 | Total Assets | $ 250 |
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