Home Equity 101: Everything You Need to Know

Home Ownership

How much do you know about home equity? More importantly, do you know how to use it to your benefit? We’ll break down the key factors of home equity, so you can make the most of this resource.

What is Home Equity?

Simply put, home equity is the amount of your home that you actually own. When it comes to lending, your home equity is commonly expressed in terms of a loan-to-value ratio (LTV). The LTV is the remaining balance on your loan compared to the appraised value of your home. If you still owe $120,000 on your mortgage, and your home currently appraises at $150,000, your LTV would be 80%.

Current Mortgage Balance ÷ Current Appraised Value = LTV

$120,000 ÷ $150,000 = .80 (80%)

Since you “own” more of your home as you continue to pay off your loan, your equity builds over time. It can also build as the market value of the house rises and can increase when you make certain renovations or upgrades.

How Much Equity Do I Need to Get Started?

You generally need to have at least an 80% LTV (see above) ratio after the loan in order to be considered. That means you must have made enough payments to own at least 20% of your home. If you have 20% equity,  you’re more likely to be considered for a Home Equity Loan or Line of Credit.

What Can Home Equity Be Used For?

Once you’ve built up enough equity, you can borrow against it and use the money for home repairs, to pay off debt, pay for emergencies, or whatever else you need to use the money for. The money can be used for anything, which makes it an appealing option for many borrowers.

How Do I Use My Home Equity?

There are a few different types of home equity products to consider:

  • Home Equity Loan: A Home Equity Loan allows you to borrow a fixed amount of money, which you receive all at once. It may be classified as either a Fixed Home Equity Loan or a 5/1 Adjustable-Rate Mortgage (ARM).
  • HELOC: A Home Equity Line of Credit (HELOC) allows you to borrow money over a period of time as you need it, up to your credit limit. Like a credit card, your credit revolves, meaning you could borrow $6,000 of your $10,000 limit, pay back $3,000, and then have $7,000 of remaining credit.
  • Interest-Only HELOC: The main difference between this and a regular HELOC is that during the draw period, you only need to pay the interest. During the repayment period, you’ll have to pay back the principal as well.

For more information on the products, see The Differences Between Home Equity Products.

Benefits of Using a Home Equity Product

The primary benefits of home equity products are that they can be easier to acquire than traditional loans and often have a lower interest rate. Plus, you may be able to take a tax deduction for some of the interest you pay (consult your tax advisor). Approval isn’t guaranteed, but with your house as collateral, you pose a lower risk, which could increase your chances to get the money you need.

How to Get Started

Now that you know the facts about home equity, we can help you get started. If you have questions about which product is best for you, simply call us at 800.845.5025. You can even apply online if you’re ready.