Using Your Home Equity

Using your home equity can help you finance home improvements, make a large purchase, pay off debt, or even provide income. Because home equity loans and home equity lines of credit use your home as collateral, there are some risks to understand before you access your equity.

The Balance’s Guide to Using Your Home Equity

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Requirements for a Home Equity Loan or HELOC
Frequently Asked Questions
  • How do you calculate your home equity?

    You can calculate your home equity by subtracting how much you owe on your mortgage from the home’s value. For example, say your home is valued at $400,000 after an appraisal and you owe $250,000 on your mortgage: $400,000-$250,000 is $150,000. To find your loan-to-value ratio (which is important to lenders), divide your loan balance by your home’s appraised value: $250,000/$400,000=0.625 (or 62.5%). The lower the LTV, the more equity you own. 

  • What is equity in a home?

    Home equity is simply the portion of your home that you own. Since most of us finance our home purchases with a mortgage, the lender has an interest in the property, too. This is represented by the amount you still own on the loan. Your piece is the difference between what you still owe and what the home is valued at. For a home valued at $300,000 and still owing $200,000, the equity is $100,000 ($300,000-$200,000=$100,000).

  • What is a home equity line of credit?

    A home equity line of credit (HELOC) is a type of home loan in which you borrow with your home’s equity as collateral. A HELOC allows you to borrow up to a certain limit set by your lender, and you only pay interest on the amount you actually borrow, similar to a credit card. In contrast, a home equity loan delivers a lump sum up front, and you pay interest on the entire amount borrowed, similar to a regular mortgage.

  • How do home equity loans work?

    A home equity loan is a type of second mortgage on your home. Your first mortgage is the one you used to buy the property. If you have built up equity in the home, you can add additional loans using your equity as collateral. This is your home’s appraised value minus what you owe on any other loans. The application and approval process is much like the process you followed with your first mortgage. You will provide income and other financial details, and you will pay closing costs.

Key Terms

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