Home Equity Loans

When a home is worth more than the mortgage that is owed on it, there is equity in the home. The estimated amount of profit that the homeowner would receive if he sold the home is the amount of equity that the home has.

How is Home Equity Built?

There are several ways that a homeowner can built equity in his home. The first is to put a down payment on the home at the point of sale. For example, if a homeowner buys a home for $300,000 and he puts a $65,000 down payment on it, he will only need to borrow $235,000. After the sale, the new homeowner will immediately have $65,000 in equity.

A home equity line of credit is a revolving credit that is based on the equity in your home. The equity of your home is the appraised market value of your home minus any liens against it, such as a first mortgage. The home equity line of credit will be determined by your lender and can be up to 100 per cent of the equity you have built in your home.

With a home equity line of credit, also known as an open end home equity loan, you will be able to use the credit of your equity as you see fit—although there may be some regulations on how you use the money, such as a minimum withdrawal each time or that you must keep an outstanding balance of ‘x’ amount of dollars.

Equity is defined as the difference between the market value of your home and how much money is left owing on the mortgage. Essentially, home equity is the money that you have saved by making payments on your mortgage. Just like a mutual fund or other savings plan, your equity makes money—by raising property values in your area and an increasing value of your home.

A home equity loan is also known as a second mortgage—the term of the home equity loan is usually much shorter than the primary, or first, mortgage. Just as with the first mortgage, the property is held as collateral for the home equity loan. If you default on payments to your mortgages, this means the bank can foreclose on your property and sell it to recoup their money. Home equity loans are more risky for lenders because the first mortgage will always be looked after first during a foreclosure—which means if the sale of the property does not net enough to cover both mortgages, the second mortgage will not be paid and the bank has to go after the borrower for the money. Because of this increased risk, second mortgages usually carry a higher interest rate than primary mortgages and usually require you to have an excellent credit history.