Home Equity Loans

Home Equity Loans

What is a home equity loan?

A home equity loan allows you to access funds by using your home’s equity. Your home’s equity is the percentage of your home’s value that you already own. It’s the difference between the amount owed on the mortgage and the value of the home. Your home’s equity can build over time as you make payments towards your mortgage or add value to your home.  

Options For Borrowing Against Home Equity

There are three main ways you can borrow against your home’s equity: a home equity loan, a home equity line of credit or a cash-out refinance. Using equity is a smart way to borrow money because home equity money comes with lower interest rates. If you instead turned to personal loans or credit cards, the interest you’d pay on the money you borrowed would be far higher.

Cash-Out Refinance

In a cash-out refinance, you refinance for more than what you owe on your mortgage. You again receive this extra money in cash that you can use however you want. With a cash-out refinance, you’ll be borrowing against the equity in your home rather than relying on your credit. This can give you access to greater funds typically with lower interest rates than other types of financing. You typically have to leave at least 20% equity in your home after doing your cash out refinance, so be sure you have enough equity to accomplish your goals. Once you refinance, you’ll continue to have a single mortgage.

Home Equity Loan

While a cash-out refinance loan effectively replaces your original mortgage, a home equity loan works like a second mortgage. You can then use this money however you want. You pay this loan back in monthly installments, with interest, while continuing to make your normal payments on your original mortgage.

Home Equity Line Of Credit

Better known as a HELOC, a home equity line of credit is more like a credit card, only the credit limit is tied to the equity in your home.  Unlike credit cards, HELOC’s typically have a lower interest rate.  

The Bottom Line

Understanding how equity works is an essential step in preparing to buy a new home or refinance your current one. By leveraging the equity you build in your home, you’ll be able to consolidate debt, pay for renovations or make updates that increase your home’s property value in the long run. However, it’s important that you explore your options and choose the right type of home equity financing for your needs. Before deciding on any of these home equity choices, be sure to speak with our Home Loan Experts.