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What Exactly is Home Equity?
Simply put, home equity is the market value of your home today minus anything owed on the home. For example, if your home could sell right now for $200,000, and you owe $150,000 on the mortgage, the home equity would be $50,000. Every time you make a mortgage payment, the equity rises. Also, as your house increases in value so does your home equity.
Considering what home equity is, there are two main ways to use it to borrow money: a home equity loan and a home equity line of credit (HELOC). When you consider taking out one of these types of debt, realize that you are using the equity in your home as collateral. If you are not able to repay the loan or line of credit, your lender has the option to sell your house in order to obtain its money back.
There are major differences between a home equity line of credit and a home equity loan, but the biggest similarity between the two is that they both incur interest. The interest rate is usually lower than credit cards or most other types of loans, and home equity loans and HELOCs are typically repaid in a shorter time frame than a first mortgage is.
There are many reasons why people take out home equity loans and lines of credit. Some people need extra money to put back into their home for improvements. They may want to add a room, replace the roof, or renovate a portion of the house. Taking the equity out of your home to do this is considered to be a good idea, especially since the money will be going right back into the property to increase its value. Other times, people need money when they experience unexpected debt, such as medical bills or a major tragedy. Other popular reasons to take out home equity loans or HELOCs are to consolidate debt, pay for college, or make a large purchase.
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