What’s Your Home Equity?
Your equity is the difference between your property’s appraised value and your remaining mortgage balance. In other words, it’s how much of your home you own.
To get an idea of your equity, check your most recent mortgage statement to see your loan balance, then subtract this amount from your property’s value. For instance, if your house is worth $250,000 and you still owe $150,000 on your mortgage, you have $100,000 in equity. Homeowners who’ve paid off their entire mortgage have 100% equity.
Tip: Remember that your home’s value can change over time. A home equity lender will order an appraisal, but you can get an idea of your home’s worth by viewing an estimate online, which is based on the sale prices of similar properties in your area.
What’s Your LTV?
If you’re interested in applying for home equity financing, you should also consider your loan-to-value (LTV) ratio. This is the percentage of your home that’s still owned by the bank (in the form of a mortgage). Generally, you must have at least 20% equity in your home, which is a maximum LTV of 80%.
To calculate your LTV, divide your mortgage balance by your home’s value. If you have a $100,000 mortgage balance on a $250,000 home, you have an LTV of 40%.
Tip: To qualify for home equity financing and the best available rates, your LTV is just one factor. Lenders will also look at things like your income, other debts and credit score.
How to Access Your Home Equity
You have three main options. The right product for you will depend on your needs.
1. Home Equity Loan
A home equity loan, sometimes called a second mortgage, works like the mortgage you used to buy your home. You receive your funds at closing and repay the money with interest in monthly installments.
Payments for your home equity loan will be separate from your original mortgage, so you’ll need to factor both into your budget. Also, your interest rate may be higher than it is for your first mortgage to reflect the increased risk to the second lender that provides your home equity loan.
Tip: If you can take on another monthly payment, a home equity loan could be a smart option for goals that come with a one-time expense, such as an individual home project or consolidating debt.
2. Home Equity Line of Credit
A home equity line of credit, or HELOC, is a revolving line of credit that works sort of like a credit card. When you use this financing, there are two phases:
- Draw Period
This is your borrowing period, which may last up to 10 years depending on the lender. You can borrow from the credit line as needed, up to your borrowing limit, to pay for multiple expenses over time. As you pay down your principal, more money becomes available to borrow.
- Repayment Period
After your draw period ends, you can no longer borrow from the credit line and will repay your outstanding principal and interest in regular installments.
If you anticipate ongoing expenses, or want to be prepared for new needs, a home equity line of credit gives you the flexibility to borrow money as needed over time. You’ll only pay interest on the funds you draw from your credit line. HELOCs don’t usually have closing costs, which keeps the upfront cost lower.
Tip: Bear in mind that HELOCs typically have a variable interest rate, which can make your long-term borrowing costs less predictable than they would be with a fixed-rate loan.
3. Cash-Out Refinance
Refinancing lets you replace your current mortgage with a new one. Homeowners often refinance to take advantage of a lower interest rate or a different repayment term, but you can also unlock your home’s equity by refinancing for a larger amount than you owe. This is called cash-out refinancing.
With this option, you pay off your original mortgage and receive the additional amount in cash. Going forward, you’ll pay back the cash you took out as part of your new mortgage payment.
Tip: This is a good option for those who need to borrow a large sum but don’t want to manage two separate mortgage payments.
Risks & Benefits of Home Equity Financing
As with any type of borrowing, you should understand the potential risks and be clear about your responsibilities. You’re using your house as collateral, so be sure you can comfortably afford to repay what you borrow to avoid jeopardizing your home.
Having said that, borrowing against your home equity can be a smart financing option for larger needs. Because of its value as collateral, your equity can help you borrow larger amounts at lower interest rates compared to unsecured financing like personal loans and credit cards.
Because there are different ways to tap your home equity, you can choose a borrowing option that suits your goals and time frame.
We’ll Help You Choose
Amegy’s bankers can help you explore your home equity options. Connect with a Mortgage Officer to get started.
Content above is offered for informational purposes only and does not constitute tax, legal, financial, or business advice. Contact a specialist about your specific needs and circumstances.