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What is “Home Equity?”

Equity is the value of your home above and beyond anything you owe against it. For example, if you own a home that would sell on the open market for $100,000, and you owe $20,000, the amount of equity you have in that home is $80,000. It’s important to remember that the value of the home is how much it would actually sell for. That means that just because a neighbor has a house similar to yours for sale for $150,000, the value of your house has not increased. The value is typically defined as that amount a willing buyer would pay to a willing seller.

How Much Can I Borrow?

Typically, companies will only loan up to a specific percentage of your available equity and that amount varies from one lender to the next. In the above mentioned example, the home owner isn’t likely to get the full $75,000, but may borrow up to 80 or 90 percent of that.

Loan Versus Line of Credit

There are two basic types of home equity loans. Both have positive points and each have some drawbacks. The home equity loan is an outright loan, similar to a refinance or a second mortgage. The loan amount is paid directly to the borrower who can then do what he wants with the loan - whether it’s pay tuition for college, take that fabulous vacation or pay off outstanding credit card debt. The upside is that the entire amount is paid out at one time and it’s up to the borrower to determine how to spend it. The downside is that the money has to be repaid with predetermined terms and the house serves as collateral. The line-of-credit home equity loan is somewhat different. In this case, the loan amount is placed into a specific account and the borrower can draw against that amount as he needs to. This is especially popular for a remodeling job when the final amount isn’t set in stone. The borrower can use what he needs without borrowing more than necessary. The positive side of this type of loan is that there is no interest on money that isn’t actually borrowed.