Home Equity FAQs

1. What is equity?

Equity is simply the amount of value a homeowner has in the property. Equity is computed by subtracting the total of the unpaid mortgage balance and any outstanding liens or other debts against the property from the property's fair market value. A homeowner's equity increases as he or she pays off the mortgage or as the property appreciates in value. When a mortgage and all other debts against the property are paid in full, the homeowner has 100% equity in the property.

Equity exists in conjunction with your Loan-to-Value ratio. Your LTV is a ratio expressing the value of your property compared to the amount of your loan. You can determine your LTV by dividing your loan amount by your property's value or selling/purchase price, whichever is lower.

For example, you buy a $100,000 home with a $20,000 down payment of your own money, and cover the remaining $80,000 with a mortgage. 80,000 divided by 100,000 gives you a Loan-to-Value ration of 80% and equity of 20%.

You can take a home equity loan or line of credit based on the amount of equity in your home. So what you are doing is actually just using money that is already yours!

2. What is the difference between a home equity loan and a line of credit?

An equity loan allows you to borrow a set amount of money at a fixed interest rate. If you need a large amount of cash, then this is a good option for you. The rate of interest is fixed so you always know what your monthly payments will be and you can use the money for a number of things including home improvements, debt consolidation or other major expenses.

An equity line of credit allows you to reserve a line of money that you can use only if you need it. You can borrow from that line at any time in the future so you have the security that if you need the money, you can access it. You will make no monthly payments until you actually draw on the money. An equity line enables you to be ready in case extra expenses arise such as medical bills, emergency home repairs, and college tuition. The interest rate on an equity line of credit is not fixed; it varies based on the prime rate.

3. What are the benefits of a home equity loan or line of credit?

Home equity loans and lines of credit enable you to acquire money to help you meet your financial goals. By tapping into the equity in your home, you are able to take advantage of lower interest rates and use the money wherever it will be able to help you out the most.

4. Why should I take advantage of the equity I have built in my home?

Whether the equity in your home is from paying off your mortgage or an increase in your property value, it is your money to take advantage of. Your home is a valuable resource and a home equity loan or line of credit enables you to access that money, with a low interest rate, and use it for whatever needs arise.