What is Home Equity?

Home equity is the difference between the value of your home and what you owe on it. This is the portion of your home that you actually “own.” Home equity can be used as collateral to secure a loan or can be used to pay for home improvements, college tuition, or other large expenses.

How Do You Calculate Home Equity?

To calculate your home equity, subtract your outstanding mortgage balance from the current market value of your home. For example, if your home is worth $250,000 and your outstanding mortgage balance is $200,000, then your home equity is $50,000.

How Can You Increase Your Home Equity?

One of the best ways to increase your home equity is to make home improvements that increase the value of your home. For example, if you invest $15,000 in a kitchen remodel and the value of your home increases by $30,000, then you’ve effectively doubled your equity.

What Are the Different Types of Home Equity Loans?

There are two main types of home equity loans: home equity lines of credit (HELOCs) and home equity loans. HELOCs are more like credit cards, with a set limit and variable interest rate, while home equity loans are lump-sum loans with fixed interest rates and repayment periods.

Home Equity Line of Credit (HELOC)

A home equity line of credit is a revolving line of credit that allows you to borrow against your home equity. You can use the funds as needed and only pay interest on the funds you use. The repayment period is usually 10 to 15 years.

Home Equity Loan

A home equity loan is a lump-sum loan that allows you to borrow against your home equity. The interest rate is fixed and the repayment period is usually 5 to 15 years. Home equity loans tend to have lower interest rates than credit cards and other forms of unsecured debt.

What Are the Benefits of Home Equity Loans?

Home equity loans offer several benefits, including:

• Lower interest rates than other forms of unsecured debt
• Tax-deductible interest payments (up to certain limits)
• The ability to use the funds for any purpose
• The potential to increase your home’s value

Conclusion

Home equity is an important asset that can be used to secure a loan or pay for major expenses. Homeowners can increase their home equity by making improvements that increase the value of their home. There are two main types of home equity loans: home equity lines of credit and home equity loans. Home equity loans offer several benefits, including lower interest rates and tax-deductible interest payments.