Buying A Home Home Loans

7 Steps For Borrowing Equity On Your Home

Kristie McCauley
Written by Kristie McCauley

You bought your house for one price and now it’s worth more. The difference in what you paid for your house and what it’s worth today is the equity you have built up in your home.

You can borrow the equity you have in your home by working with a bank or mortgage company. Typically, you have a first mortgage already on your home so when you borrow equity you do so with a second mortgage or a home equity loan or line of credit.

When you’re ready, these are the seven steps you have to take.

1. Purpose the Funds

Before you run to the bank or lender, the first thing you want to do is determine the reason you want to access the equity in the first place. Some homeowners have an immediate need for these funds, while others simply want to have something in place in case they need to access the equity in an emergency.

2. Choose the Right Type of Loan

Once you know what you need the money for you can easily choose the right type of equity loan or line of credit to access these funds. If you have an immediate need for the money, then it is typically best to use a home equity loan.

A home equity loan:

  • Has a fixed interest rate
  • Provides you with a lump sum amount upfront
  • Requires you to start making payments on the funds right away
  • Tends to have a lower interest rate than a home equity line of credit

If you’re in a situation where you need to access the money a little at a time or just need to set up something in case of an emergency, then a home equity line of credit (also known as a HELOC) might be right up your alley.

A home equity line of credit:

  • Allows you to access funds as you need them instead of as a lump sum (similar to how you would use a credit card)
  • Requires you to make payments on the amount you have used rather than a lump sum amount
  • Has a variable interest rate
  • Is a revolving line of credit so as you use it and pay it back is available for you to use again

3. Estimate the Equity You Have

The lender requires an appraisal to determine the current market value of your home, but you can estimate the market value for now by looking at sale prices for homes in your neighborhood that are similar to your own home.

Websites, such as Zillow.com, provide an estimate of your home value.

If you have a first mortgage (or any other mortgages on your home), you have to deduct the balance of the existing liens to determine how much equity you have built up in your home.

For example, if your home is worth $100,000 and you have a mortgage balance of $50,000, then you have $50,000 in equity ($100,000 – $50,000 = $50,000). A bank or lender, however, is not likely to lend you 100% of your equity, so expect to be able to borrow 80-85% of the equity.

About the author

Kristie McCauley

Kristie McCauley

Kristie Lorette McCauley is an award-winning expert on personal finance, mortgages, and credit. She has published articles on major finance and credit blogs, such as Yahoo! Finance, Quizzle, Money Crashers, and BankRate. She is also the author of books, such as How to Use the Equity in Your Home or Business Today to Invest for Tomorrow and How to Open & Operate a Financially Successful Personal Financial Planning Business.

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