One of the main advantages of being a homeowner, other than loving your home, is the ability to build equity. Over time, as you continue to make your regular mortgage payments and pay down your mortgage, you create equity in your home.
Home equity is the difference between the amount your home is worth (market value) and the amount you owe on your mortgage and any other loans secured against your home. For instance, if your home is worth $500,000 and you owe $350,000 on your mortgage, you have $150,000 in home equity.
As a homeowner, you can use the equity in your home to secure a lower-cost term loan or line of credit that can help you to fund your home renovations, your child’s education, or to fund the down payment on a second home.
A home equity loan is a secured term loan that allows homeowners to borrow money against the equity in their home. The home equity loan will be secured by a mortgage registered on title to the home, meaning the lender can claim and sell the home if you default under the loan. How much you can borrow will depend on the amount of equity you have accumulated.
With a home equity loan, you can typically borrow a larger amount of money at a lower interest rate than you can with an unsecured loan.
A home equity term loan comes in the form of a one-time lump sum amount. This amount can be up to 80% of the appraised value of your home, minus the balance of any prior mortgage. It has to be repaid over a specified term unless it is renewed at the end of that term.
A home equity line of credit (HELOC), is a secured form of revolving credit. As with a home equity term loan, a HELOC will be secured by a mortgage registered on title to the home.
A HELOC is a form of revolving credit. Revolving credit allows you to borrow money whenever you need it up to a predefined credit limit. As long as you have credit available, you can continue to borrow against it.
Home equity lines of credit typically come with a variable interest rate that is tied to the lender’s prime rate, which means your rate can fluctuate over time with interest rate changes. Your payments will vary based on how much money you currently owe on the line of credit and the applicable interest rate. You only pay interest on the amount of money that you use.