Home Equity

Home Equity: What is it and how can you use it?

Definition: Home equity is the value of your home, less any outstanding mortgage loans against that home. 

Home equity is usually positive, that is, the home is worth more than the mortgage. However in times of low demand for housing or recession, the value of a home may be less than the outstanding mortgage. The home equity would then be termed "negative home equity".

Home Equity Loan

A home equity loan (sometimes abbreviated HEL) is a type of mortgage loan in which the borrower uses their home as security, and can use the equity to to an agreed level of the value of the home, usually between 80% and 95% of the value of the home. So if you have positive equity in your home you can spend this up to a level agreed by the lender.

Most home equity loans are refinanced as first mortgage loans. However there are US companies that offer second mortgages for this purpose. [A top up mortgage loan where the lender has second call on the security, with primacy given to the first mortgage holder should the borrower default]

Uses of Home Equity Homes

Home Equity loans are used to finance:

The recent dramatic fall in auto sales can be in part in our view, put down to the fact that over recent times home equity and wages has not grown sufficiently to allow home equity to be tapped.

Credit Rating to get a Home Equity Loan

Home equity loans require good to excellent credit history, and reasonable loan-to-value and combined loan-to-value ratios. However there are home equity loans for people with bad credit histories.

Home Equity Line Of Credit

The Home Equity Line of Credit (HELOC), is an open ended, or evergreen mortgage loan, invented by Citibank, and now offered many many mortgage lenders and has a variable interest rate, where the payments are interest only repayments. The loan value stays constant and the loan principal is never paid down.

As equity in the home grows, so to can the home equity loan be increased as agreed with the lender.

Home Equity Principal and Interest Loan

This type of home equity loan is an amortising loan where the loan is paid down over time with an adjustable [variable] interest rate, where the mortgagor can borrow up to the credit limit set by the lender [mortgagee], and then make extra payments to pay down the loan faster.

These types of home equity loans can have an interest only, and a fixed rate period at the front end of the loan to allow borrowers to reduce their repayments in the early years of the loan.

Principal and Interest Home Equity Loans are a good way for people with a desire to eventually have the loan paid out to finance their home.

Lines of credit are good ways to use the equity and keep the repayments as low as possible where repayment of the loan is not a priority.