Being a homeowner has many benefits, including the opportunity to build home equity. Whether your home equity is high from paying down your mortgage loan or from a rise in your home's market value above the amount owed, you may be eligible for a sizable loan amount. But what exactly is home equity lending, and how does it work? Continue reading to learn more.
What Is Home Equity?
Quite simply, home equity is your home's current value minus the amount still owed on your mortgage. If what you get is a positive number, then you have equity. For example, if your home has a current value of $250,000 and the amount owed on your mortgage is $200,000, your home equity is $50,000.
Generally, the speed at which your home equity grows depends on the principal amount on your mortgage and property value. In most cases, the home equity grows with your continued stay in your home, so don't expect it to be an overnight thing.
How Home Equity Loan Works
There are three main types of home equity loan programs. First, you have a fixed-rate home equity loan, where the loan amount comes in the form of a lump sum. You'll then be making monthly payments, inclusive of principal amount and interests. As the name suggests, the interest has a fixed rate, and you're supposed to pay within a specified time depending on the amount you have borrowed and the loan terms agreed upon with your lender.
Secondly, there's the home equity line of credit (HELOC). This is a revolving line of credit with adjustable interest rates. It works like a credit card in that the credit given is set to a defined maximum amount. However, the interest rate is lower than for credit cards, and you're only required to pay back the amount you have borrowed.
Thirdly, you have cash-out refinancing. Here, you pay off your current home loan and take another one that's larger than the amount owed. For example, if your home is worth $200,000 and your mortgage is only $100,000, you can take a cash-out refinance for a loan worth $175,000. You get $75,000 in cash and then begin to make new, larger mortgage payments.
How You Can Use Home Equity Loans
You can use your home equity loan in whichever way you want—it doesn't have to be a home-related project. However, if you utilize the funds to make major home improvements, your loan will be tax-deductible.
Also, the fixed-rate home equity loan is most suitable for large projects or major expenses, considering the money comes in a lump sum. If you need access to varying amounts over a large period, like when you want to run a small business or fund your ongoing education, a HELOC may be your best option.
For more information about home loans, contact a local lender.