What is home equity?
Home equity refers to the share of your home you own. If you own the home free and clear of any liens, you have 100% equity. If you have an existing mortgage, you can calculate your home equity by taking your home’s current market value and subtracting the remaining balance of any loans.
This means that every time you make a monthly payment on your existing mortgage, you’re building equity in your home. And if you make a down payment, you’ll have built-in equity from the day you move in.
For instance, if you purchase a $250,000 home with a $50,000 down payment, you’ll already have 20% equity in your home.
The more you pay into your home, the more your home equity will increase. That said, your home equity can fluctuate over time. This is due to the rise and fall of home values in your area. Your equity will be highest when housing prices rise and lowest when the real estate market cools.
Home equity loans and home equity lines of credit allow you to convert this equity into cash. You can use these financing options to cover home improvements, but you’re also free to use your home equity to consolidate debt or cover an unexpected purchase. It can also be used to set up an emergency fund, buy a new car, truck, boat, or RV, pay for college tuition, or cover an unexpected purchase. The choice is yours!
How does a home equity loan work?
In a home equity loan, you’ll be accessing the equity in your home and converting it into cash. You’ll receive the loan amount in a single, lump-sum payment. You’ll then pay back the loan (both the principal and interest) over a predetermined loan period, which can range anywhere from five to thirty years, depending on your lender.
The exact eligibility requirements vary by lender, but most lenders will require applicants to have at least 20% equity in the home.
The amount of your loan will be determined by your combined loan-to-value ratio. This is the ratio between your home’s appraised value and the amount you currently owe on the home.
Lenders will also look at things like your employment history, credit history, debt-to-income ratio, and other financial factors, just as when you applied for a mortgage. These factors can influence your loan term, interest rate, or even the amount of the loan.
The drawback is that you’re using your home as collateral on the loan. If you’re unable to consistently make payments on your loan, the lender can foreclose on your home. That’s especially important to think about if you’re still making regular mortgage payments.
How to calculate home equity
A home equity loan works by tapping into your existing home equity. But how much equity do you have in your home? It’s quite simple. Just subtract the amount you owe on your mortgage from your home’s current value.
Make sure you’re subtracting your mortgage balance from your home’s current value, not the original purchase price. The resulting figure will tell you how much equity you have.
For example, imagine you have a home that is currently valued at $300,000. Your current mortgage balance is $125,000. This means that you have a total of $175,000 in equity. Assuming your lender allows you to borrow 80% of your equity, you can receive a home equity loan as high as $140,000.
How do you determine your home’s value? Your lender will conduct an appraisal before issuing the loan. Some programs require a full appraisal while others, such as CCM Equity Express, use an Automated Valuation Model.
If you’re looking for a preliminary ballpark, you might browse real estate sites to get a general idea of what to expect. Just remember that this value may not be what your lender will use to determine your loan.
Types of home equity loans
Not all home equity loans will work the same way. If you want to borrow money from the equity in your home, you might consider one of the following home equity loan options. Each of these options has unique features and pros and cons, so make sure to learn as much as possible about these loan programs before applying.
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CrossCountry Mortgage offers a specialty home equity product known as the CCM Equity Express. This is a home equity line of credit (HELOC) that comes with fast approval and a fixed interest rate.
You can apply online in as little as five minutes and receive 100% of your loan amount as soon as five business days after approval. You can borrow up to 85% of your home’s value for a loan between $25,000 and $400,000.
Unlike a traditional HELOC, the CCM Equity Express can be completed with an automated appraisal valuation instead of a formal appraisal.
Borrowers can complete the online application and even sign electronically to streamline the process even further. Additionally, you’ll enjoy fixed rates instead of the variable interest rates of traditional HELOCs.
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A built-up home equity line of credit (HELOC) works a little differently from other home equity loans. Instead of receiving the loan in a lump-sum payment, borrowers open up a line of credit, not unlike opening up a consumer credit card. The idea is simple — you can borrow money up to a certain credit limit, then repay the loan based on how much you’ve used.
The advantage of a HELOC is its flexibility. Instead of withdrawing a set dollar amount, you can access what you need when you need it. That’s great when you’re completing home improvement projects that don’t have a clear budget. As long as you repay the balance, you can continue using your HELOC to finance your projects.
The drawback is that a traditional HELOC has both a draw period and a repayment period. During the draw period, you are only required to make interest payments. Then the HELOC rolls into the repayment period and you will be required to make both principal and interest payments.
It’s easy to lose track of how much you’re spending during the draw period, which can make it challenging to repay the loan.
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Most home equity loans function as a second mortgage. A cash-out refinance replaces your existing mortgage with an entirely new one.
The idea is simple — you’ll take out a new mortgage for more than you currently owe on your house. You’ll then receive the excess in a lump-sum payment, which you can use for home improvements or other expenses.
Since you’re replacing your current mortgage, you may be able to secure a loan with a better interest rate. But keep in mind that you will still pay closing costs and other fees, so it’s important to make sure that the new loan will be to your financial advantage.
You will also be subject to an approval process. If your credit score or debt-to-income ratio has changed since your first mortgage, you could qualify for different terms.
The drawback is the same as any other type of home equity loan. If you are unable to repay the loan, you could lose your home to foreclosure. Securing favorable home equity loan rates can make it easier to fit this loan into your budget.
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A reverse mortgage is a specialized type of home equity loan. In a reverse mortgage, your lender pays you, which is why the program is so popular among retirees. You will still need to have enough money to cover closing costs, but afterward, you will receive a steady stream of income.
The lender cannot recall the loan unless the homeowner dies, moves out, or sells the home. When you die, your heirs will take over the loan, which they can typically repay by selling the home outright.
To qualify for a reverse mortgage, you’ll have to meet additional requirements. You must:
- Be at least 62 years of age
- Own the house outright or have a very low mortgage loan balance
- Use the home as your principal place of residence
- Have a home that is in good shape and not in need of repair
- Be free from any federal debts (income taxes, federal student loans)
However, you’ll still need to keep up with things like property taxes, homeowners insurance, and other related costs. Still, a reverse mortgage can be an effective way to fund your retirement dreams.
HELOC vs. home equity loan
Which home equity loan program is best for you? Many homeowners are torn between a home equity loan and a home equity line of credit. But these two loan programs are very different. Here’s how to compare the two.
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Home equity loan
A home equity loan will typically offer the following features:
- A single, lump-sum payment
- Repaid in fixed payments over a predetermined loan term
- A fixed interest rate
- Predictable payment structure
A home equity loan can, therefore, be the best option for those who need a specific amount of money. If you’re looking to pay for a one-time expense, a home equity loan can provide you with the necessary funds.
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Home equity line of credit
By contrast, a home equity line of credit offers features that include:
- A revolving line of credit rather than a lump-sum payment
- Flexible borrowing and repayment options
- Variable interest rates
However, some HELOC programs (including the CCM Equity Express) offer fixed rates. The larger point is that a HELOC provides flexible funding for borrowers who are uncertain of their actual financing needs, which is common when completing certain home improvement projects.
Tap into the money you already have
Home equity is yours, so why not tap into your home’s value as a source of financing? This is especially true when home values rise dramatically. Now may be the perfect time to access your home equity through a loan or line of credit.
Thanks to the CCM Equity Express, it has never been easier to gain access to fast financing. And unlike other HELOC programs, you will get the advantage of a fixed interest rate. To learn more, contact CrossCountry Mortgage today to find the option that fits your needs.
