Equity home loans allow you to take out a loan on the amount of equity that you have in your home. So, in the above example, you would look for equity home loans that totaled no more than $75,000, because the other $100,000 is still being used as collateral to back your original mortgage.
How to Get Equity
As you pay down the balance of your mortgage, you gain more equity in your home. You can also gain more equity if home values rise significantly. If you are purchasing a home, you can get instant equity by offering a price that is lower than current market value or by putting up a down payment. A 20 percent down payment will give you an instant $35,000 in equity on a $175,000 home. If you can snag that home for $150,000, then you will have an instant $55,000 in equity with a 20 percent down payment.
What Equity Home Loans Are & Aren't
A home equity loan is...
- Completely separate from your current mortgage.
- A way to borrow extra money using the value that you have in your home.
- An option only for people who have unleveraged equity in their home.
A home equity loan is not...
- An add-on to your current mortgage.
- An option for people who owe more than their home is worth.
- A way to refinance your current mortgage and get a lower monthly payment.
Leveraging Your Equity
You cannot leverage the equity in your home over and over. If you have $75,000 in equity and you take out a $75,000 home equity loan, then you will not be able to use your home's equity to get more money until you earn more equity by paying down your mortgage, paying down your home equity loan or unless your home gains more equity through rising home values. Once you have regained equity in your home, then you will be able to leverage it to borrow more money.
Equity Home Loans & Interest Rates
Remember that each new loan you take out may have a different interest rate, depending on your credit and debt-to-income ratio. If your credit has dropped or if you have a high debt-to-income ratio, then lenders may see you as a bigger risk and, in response, give you a higher interest rate.
Alternatives to Equity Home Loans
Equity home loans are not the only way to get money out of the equity that you have in your home. If you also need to get a lower interest rate or lengthen the life of your current mortgage, then cash out refinancing may be a better option than a home equity loan. This way, you will not only be able to borrow money, but you will also lower the monthly payments on your current mortgage.
With cash out refinancing, you refinance the amount that is left on your current loan and then take out extra money on your equity. Using our earlier example, you would refinance the $100,000 that you still owe on your mortgage, plus receive an additional amount up to $75,000 for the equity that you have in your home. This would all be rolled into one loan, with one payment every month.
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