Home Equity: Home Equity Line of Credit
“Home equity” is a common
term heard among those working to purchase a home or looking into mortgage refinancing. Having a basic understanding of
what home equity is and what it means to you is important, before you make decisions about a getting a loan for
a mortgage refinance or a home purchase.
The difference between the appraised or market
value of the home and the amount of your home loan is your home equity. When you put money down on a
home, or make your down payment at closing, you are actually paying for equity in your
lender will usually only lend you 90% or less of the appraised value of the home. This will give you a 10% or
more home equity to start with.
When you purchase a home the amount of the loan
you are able to qualify for is based on the appraised value of the home, rather than the asking price of the
home from the seller. The lender will send a licensed appraiser to go to the home and figure its market value by
evaluating the home and looking at the recent selling prices of similar homes in the area. This gives the lender
confidence that the property is worth a certain amount, and he will base the amount of your loan on that
lowers the risk of the lender because if the borrower defaults on the loan, the lender should be able to sell
the home for the appraised value and recover most, if not all of his money.
Understanding the home equity is an important
factor when you are looking at a mortgage refinance, and especially if you have bad
you do a streamlined refinance, you are simply rolling the loan over to a new interest
rate. However, if you are getting a cash-out refinance, your home equity will be the determining
factor in the amount of cash you can receive from the process. For example, if your home's
value is $100,000 and the current amount of your mortgage loan is $60,000, you have $40,000 in home
equity. The bank will lend you up to 80% of the value of the home, so your mortgage refinancing
nets you a new loan of $80,000, and you may be able to get $20,000 out in cash to use
If you have bad credit, you may need to get a bad
credit mortgage when you refinance.
You may be able to use the cash out from your home equity to pay off a high
interest debt so that you can make your mortgage payments more easily. Making your payments on time or
paying additional money to the principal of the loan will help your equity to grow more
will put you in a better financial position in case you need to do any type of refinance or other mortgage
transaction in the future.