Using the Equity in Your Home

Equity is a home's value when compared to the mortgage that is on the house and can be either negative or positive. Negative equity refers to the situation when the amount owed on a home mortgage is greater than the home's appraised value; for example, if you owe $238,000 on a home and a professional appraisal values your home at $175,000. If your home has positive equity, that represents value to a mortgage lender that can be used to your benefit in the form of cash or credit that you will be allowed to spend.

Home Equity Loans

A home equity loan is a type of 2nd mortgage that is taken out against the value of your home in excess of the primary mortgage on the home. If your home is completely paid off then it has 100% equity and you will most assuredly be eligible for a home equity of loan.

Home equity loan amounts are determined by a formula set up by the mortgage lender. Some lenders will offer you up to 75% of your home's total equity as a loan, while others may be willing to offer 80% or even 95%. A few lenders offer mortgage rates that allow a home owner to borrow 100% to 150% of the equity value of their home but these lenders (and their offers) are best avoided since such loans are risky and often prohibitively expensive.

Home equity loans can be used to pay off or consolidate debts, pay for a college education, handle emergencies that require large sums of money, remodel or refurbish your home or whatever need you have that requires a large sum of money. You may borrow as little or as much against your home's equity as you wish, though some lenders may impose a minimum loan requirement.

Home Equity Lines of Credit

A home equity line of credit is drawn against the positive equity value of your home just like a home equity loan is. The difference between the two mortgage products is that the home equity line of credit acts as a reusable credit line rather than a simple fixed loan. Available for a standard term such as 10 years, home equity lines of credit may have variable interest rates as well as limitations or requirements such as a minimum amount you are allowed to charge at once (several hundred dollars), or a maximum period that can elapse without any charges being made, (you may be required to make at least one charge every six months or the account will be closed). The home equity line of credit is a better option for financial needs that require multiple payments over time such as college tuition and books, or home remodels or building add-ons that require payments to multiple contractors as the work is completed.

Whichever home equity product you are interested in, the mortgage rates that are offered to you will be credit based and based on your home's value as well as its equity. A professional appraisal, completed recently (within the last six months) will also be required, usually at your expense, though some lenders may pay for an appraisal in order to try to earn your business. Receiving multiple quotes for a home equity product is the first step to ensuring that your second mortgage does not turn into a nightmare scenario that can result in your possibly being foreclosed on your home or having a lien placed against it in the future.