Think about finding spare change in your couch-cushions or in the back of a drawer. Home equity can be a little bit like that, except you could be “finding” thousands of dollars in your home – money you didn’t even realize was there. If you need to boost your cash flow, you can borrow against this amount of your home’s value.
The two basic forms of home equity borrowing are the home equity loan and the home equity line of credit (HELOC).
Home equity: what it is & how it works
Equity is typically the difference between the appraised value of your home and how much of your mortgage you have left to pay off. For example:
- The appraised value of your home is $150,000.
- The balance owed on your mortgage is $100,000.
- Therefore, the appraised value ($150,000) minus the balance owed ($100,000) equals the amount of equity ($50,000).
The equity you have in your home can be used as collateral for a second loan on your property.
Over time, the value of your home may increase. If you have made home improvements or your neighborhood schools improve, the value of your real estate may improve – increasing the amount of equity. Equity is one of the benefits of owning a home.
Equity terms & definitions
Here are some common terms to help you better understand home equity.
Something of value you offer to guarantee you’ll repay a loan. For a home equity loan or HELOC, your home is used as the collateral. If you default on your payments, the bank could collect on your collateral – foreclosing on your home and taking ownership. So the risk of using your home as collateral is something you should consider when deciding if borrowing against your home’s equity is right for you.
The amount of time you have to withdraw funds and make purchases with a HELOC. You may access your HELOC through checks or a credit card. Once the draw period has expired, you may no longer draw on your HELOC.
An interest rate that doesn’t fluctuate. A home equity loan carries a fixed interest rate, in contrast to a variable interest rate with a HELOC. The fixed interest rate calculation is determined when you apply for the loan, and remains consistent throughout the life of the loan.
Home equity loan
A lump-sum loan that uses your home’s equity as collateral. Also known as a second mortgage loan, a home equity loan is secured with a fixed interest rate and a specific repayment period, so your monthly payments stay constant.
Home equity line of credit (HELOC)
A revolving line of credit that consists of a draw period and a repayment period. The HELOC is similar to a home equity loan in that you use your home’s equity to secure the credit line. In contrast to a lump-sum loan, it’s like a credit card account from which you can draw as needed. Depending on your borrowing needs, having access to a HELOC may be a better solution for you.
The cost of borrowing money. The interest rate applied to your home equity loan or HELOC is determined by a number of factors, which may include how much debt you currently have, your income and your credit score.
Life of the loan
The total time period established by your lender during which you’ll use and repay your loan.
The time after the draw period, when you repay what you’ve borrowed. The repayment period begins when the draw period of a HELOC has expired, or once funds have been disbursed for a home equity loan. During this time, you must make your scheduled payments on your balance.
If you default on your payments, your lender could collect on your collateral – in this case, your home. This is an important thing to remember when choosing your financing options.
Tap into your home’s equity
Now that you know what equity is, apply for a home equity line of credit today, and get the flexible options and attractive rates you deserve.