What is Home Equity, and How do I get Credit?

Home equity is essentially the amount of your house that is paid off. In other words, your home equity is the value of the house (not the value of the last sale, but the actual appraisal value) less the amount that is currently mortgaged. Your home equity can be used to help get you loans and line of credit, or you can simply let it accrue.

Your home equity can be a wonderful tool to help you accomplish things like remodels, pay for your education or that of your kids, or even take a vacation and forget about the world for a while. The home equity line of credit is not specific in possible uses. In fact, you can use it for anything you want to, just like a regular credit card.

A home equity line of credit is different from a home equity loan. The home equity loan is for a fixed amount, and you receive the money in one lump sum. Your home equity line of credit, however, is like a credit card. The amount of your equity provides the credit limit for your card (meaning that the limit keeps growing as you pay off your mortgage and/or the value of your house rises). You use the card to make purchases (or book your flight to Hawaii!) and pay it over time just like a regular credit card.

There are several places you can go to apply for your home equity line of credit if this sounds like the answers to your prayers. You can ask your local bank or mortgage company for a line of credit, and compare their rates to the ones that you can get online. Your credit limit will be the same (or close) at each because your equity is the same, but the rates charged will differ.

Your individual credit score will determine the likelihood that you will be allowed the line of credit, and the interest rates that you will be charged for spending on the account. The higher your credit score is, the lower interest rate you will be charged on your home equity line of credit. This means that if you were planning on using your equity to pay off the mortgage payments you’ve been missing lately, you would be better off finding another way to make up the sum.

If your credit is good and you just want a little extra spending money, however, a home equity line of credit can be a great thing. You should make payments on it promptly, as the credit, like a mortgage, is borrowed against your house. You would not want to do anything to jeopardize your home, after all.

If it is looking like the right time to spend a little money on whatever project you have been waiting for, be it hard work or lots of fun, then a home equity line of credit could be just the right thing. As long as you are responsible with your money (and don’t treat this like a bottomless account), go ahead, pamper yourself.