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.

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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