What Is Equity? Learn How to Calculate it for Your Home

Table Of Content

• More student loan forgiveness available, but April 30 deadline looms
• Home Equity Loan Requirements
• Options For Borrowing Against Home Equity
• Focus On Paying Off Your Mortgage

Just like a regular mortgage, a home equity loan uses your home as collateral—meaning the bank could seize it if you severely default on your payments. If your home is valued at $200,000 and you owe $100,000 on your mortgage, you may be able to borrow around $85,000 (even though you have $100,000 in equity). However, depending on your LTV and credit score, the actual amount could even be less. If you have a high LTV or a low credit score, you may only be able to borrow a smaller percentage of your home’s value.

More student loan forgiveness available, but April 30 deadline looms

If all or part of your home is funded with a mortgage loan, the mortgage lender has an interest in the home until you pay off the loan. Home equity is the portion of a home's current value that you own outright. Home equity is an asset that you can borrow against to meet important financial needs such as paying off high-cost debt or paying college tuition. Learn more about how home equity works, how to calculate it, and how you can use it. In most cases, you can use the money from your home equity loan however you see fit. Use it to consolidate debt, pay for college, cover the cost of repairs or help you through a rough financial patch.

Home Equity Loan Requirements

Traditional home equity loans have a set repayment term, just like conventional mortgages. The borrower makes regular, fixed payments covering both principal and interest. As with any mortgage, if the loan is not paid off, the home could be sold to satisfy the remaining debt.

Options For Borrowing Against Home Equity

The amount of home equity you can borrow varies by lender, but many lenders want you to keep at least 15% equity in your home. Other lenders may allow you to keep as little as 5% equity in your home. The better your credit, the more home equity your lender may let you borrow. Local homes and neighborhoods can fall into disrepair and become less desirable over time. Under these conditions, property values can decrease rather than increase. Plus, macroeconomic forces at the national level can reduce home values, such as during the 2008 housing crisis.

When home values fall, you may have less equity than you had before. This can cause problems if you go to sell or refinance your mortgage. Most lenders require you to have at least 20% equity in your home before you can refinance. At the time you buy, your home equity would be $35,000 or the amount of your down payment. Once you have paid off your mortgage you’ll have 100% equity in the home. Home equity is an asset that increases your net worth and boosts your financial stability.

Pay for college

You can get a home equity loan by contacting a lender who offers these types of loans. The first step is to get a professional appraisal of your home to find out its market value. If you have enough equity in your home to take out this type of loan, a lender will also check your credit and debt-to-income ratio. If you qualify for a home equity loan, your loan funds are usually delivered in a lump sum after the closing.

Figuring out how much you can use toward your down payment is a big step in understanding how you’ll build equity in your home. Getting preapproved for a mortgage before you make an offer will help you understand how much of your savings you’ll need to use toward your down payment. If your finances have taken a hit at the same time as your mortgage going underwater, you have a few not too pleasant options to get out from under the debt.

Home Equity Line of Credit

Also, take note of introductory offers like initial rates that will expire at the end of a given term. Most HELOC rates are indexed to a base rate called the prime rate, which is the lowest credit rate lenders are willing to offer their most attractive borrowers. You can draw from a home equity line of credit and repay all or some of it monthly, somewhat like a credit card. Unlike a credit card, however, HELOCs are not intended for minor expenses. Even after all the equity in your home is paid out, you can keep living in your home. You won’t need to make any payments on the amount you received from the reverse mortgage.

Before you decide how to use your home equity, it’s crucial to understand how it works to see whether it’s the right financial move. Your home equity will generally increase over time as you pay your mortgage or improve your home. Plus, the market value of real estate often appreciates (goes up). When this happens—so long as you haven’t increased the debt on your home—your home equity also increases.

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Basically, a home equity loan is a second mortgage on your house. Mortgage refinance and home equity loan interest rates are typically much lower than interest rates for credit cards, auto loans and personal loans. If you have any of these high-interest debts, you can save big by putting your home’s equity to work.

Home equity loans allow homeowners to borrow against the equity in their homes. The loan amount is based on the difference between the home’s current market value and the homeowner’s mortgage balance due. Home equity loans tend to be fixed-rate, while the typical alternative, home equity lines of credit (HELOCs), generally have variable rates. Those who have had past credit issues know that it tends to be easier and less costly to obtain a home equity loan than a personal loan.

It consists of any down payment made, the portion of the mortgage payment made that pays down the principal and any appreciation of the value of the home. Once you close on your home equity loan, you’ll receive a lump-sum payment from your lender, and in return, you’ll make payments on the loan over a predefined term. When you do a cash-out refinance, you usually need to leave some equity in the home. The amount you’ll have to leave depends on the type of loan you’re seeking, but you should expect to leave about 20% equity in the home. You can get access to your home equity through a cash-out refinance, a home equity loan, a home equity line of credit (HELOC) or a reverse mortgage. To calculate your equity, determine how much you still need to pay on your mortgage principal.