You may have heard a lot recently about home equity and home equity loans, but if you’re like many people you might not fully understand what equity is or how it’s used for loans and other purposes.
In order to help you to understand the workings of equity and how you can best use the equity that you have, a practical definition of equity and some of its most common uses are outlined below. Additionally, information on how to build equity in your home or real estate is provided for those who don’t have as much equity in their property as they might like.
If you’re going to use the equity that you’ve built up, it’s important that you understand exactly what equity is so that you can see how it’s used. Equity is basically a measure of how much of a mortgage loan has been paid off and how much of the real estate in question you actually “own.” Equity is most often represented by a percentage, indicating that you’ve invested that much of the total value of the property into its purchase.
Lenders may use the equity that you’ve built up in your house or other real estate as a form of collateral for reduced interest loans or lines of credit, creating a secondary lien on the property that has its own terms and rates that are independent from the original mortgage.
The most common usage of equity is being used as the collateral that secures a loan. Many banks and other lenders are more than willing to offer competitive interest rates for home equity loans, even to individuals with less-than-perfect credit, simply because of the relatively high value that most real estate and equity brings with it. These home equity loans may be for more than the individual might otherwise be able to borrow depending upon the lender, the value of the property, the amount of equity that the borrower has in the property, and the credit history of the borrower.
Common uses of home equity loans are alternatives to traditional financing, paying for continued education, debt consolidation, home repairs and improvement, and vacation planning.
Equity lines of credit
The other common use of equity is as collateral that secures a line of credit. Much like a home equity loan, these credit lines can be offered by a number of banks and other lenders to individuals of a variety of credit ratings. Home equity lines of credit may even be issued with lower interest rates than some equity loans, since the amount borrowed is spread out over time instead of being in a lump sum.
Equity lines of credit are often used in home improvement projects to pay for materials and labor, as well as a variety of other personal and business ventures in lieu of a standard credit card or other credit line. The amount of credit available on the credit line depends on many of the same factors that influence equity loan decisions.
In order to build additional equity in your home or other real estate, it’s important to stay up-to-date on your mortgage payments and to pay as much as you can toward your remaining mortgage balance. As you continue to pay down your mortgage, the equity that you have will continue to rise.
Should you take out a line of credit or loan with your equity, the amount borrowed will factor into the amount owed on your house and reduce your equity accordingly… meaning you’ll have to repay it to build equity as well.