Understanding Home Equity

What is home equity and how do I use it?

Home Equity Information

Posted on Sep 10, 2020

One of the biggest benefits of home ownership is the ability to leverage your home to help pay for the things you need. From renovations and repairs to financing large purchases to consolidating debt—your home can be a powerful tool if you know how to use it.

Learn the basics to understand how you can benefit.

What is home equity?

When you buy a house with a mortgage, you own part of the house and the lending institution owns the rest. As you make payments, you are buying more shares of ownership. When you pay off the mortgage, you own the entire property.

Simply put, home equity is the amount of your house or property that you own.

How is equity calculated?

The amount of equity you have depends the current market value of the house and the amount you owe.

Home Equity = Current Market Value – Amount Owed

If, for example, your home is worth $400,000 and you owe $250,000 on your mortgage, then you have $150,000 in equity.

How can equity increase?

There are two ways equity can increase:

  1. The current market value of your home increases. 
    When your house goes up in value, you gain more equity. One way to increase the market value of your home is to make improvements and upgrades. The market value can also increase based on area supply and demand and many other factors.
  2. The amount you owe decreases.
    As you continue to make payments, the amount you owe will reduce. This means you own more of the property and therefore have more equity. Making additional payments or larger payments can be a way to increase your equity faster.

Borrowing equity from your property

Home Equity Loans and Home Equity Lines of Credit (HELOC) are the most common ways to access the money saved up in your house.

Home Equity Loans provide a one-time lump sum amount at the start of the loan. These loans are fixed rate, which means you have the same monthly payment the entire life of the loan.

HELOCs function more like a credit card. You qualify for a maximum approved amount and can borrow what you need when you need it. There’s a borrowing and repayment period. HELOCs are variable rate, which means your monthly payments can change.  

Learn more about the difference between Home Equity Loans and HELOCs.

Risks of using home equity

Home equity products offer great rates because they are secured with your house. The downside is falling behind on payments puts your house in danger of foreclosure.

For this reason, it’s important to only borrow what you need and can comfortably repay. If you expect a change in income or are concerned about other obligations, ask a lender about your options.

Additionally, it’s not guaranteed the value of your home will go up over time. Economic downturns, market fluctuations, and real estate demand can dramatically change the appraised value of your home and therefore your equity. 

If the value goes down significantly, you could end up owing more money than your home is worth. It’s much harder to sell, refinance, and qualify for other loans when this happens.

Read more about the benefits and drawbacks of using home equity products.

How to qualify for a home equity loan or line of credit

As with most loans, you’ll want to talk to a lender about your specific needs and the application requirements. 

Most lenders require a certain amount of equity before issuing a loan or line of credit. There is also a cap on the maximum borrowing amount. This amount can change from lender to lender but is often around 80% of your current equity. 

Additionally, lenders will consider your credit score, income history, current debts, and several other factors in determining what you qualify for.

Next steps

Home equity is a great financial tool that can help you finance big projects, consolidate debt, and complete renovations and repairs. If you’re ready for a Home Equity Loan or Home Equity Line of Credit you can apply online or visit one of our locations.

Remember to ask your bank or lender if there are any special promotions or rates available.