Home | Resources | Advertisement







Home Equity - Home Equity Line of Credit    


When you are purchasing a home or looking to do a mortgage refinance, one of the most common terms you will hear is "home equity." You need a basic understanding of this term and what it means to you before you make any important decisions about mortgage refinancing or a home purchase.


When you purchase a home you will find that the amount of the loan is based on the appraised value of the home rather than the asking price from the seller.  The lender will send a licensed appraiser to go to the home and look it over as well as to look at the prices that have been paid for similar homes that have been sold in the area recently.  This gives the lender confidence that the property is worth a certain amount, and he will base the amount of your loan on that value.  This lowers his risk because if the borrower defaults on the loan, the lender should be able to sell the home for the appraised value. 


When you put money down on a home, or make your down payment at closing you are actually paying for equity in your home.  The difference between the appraised or market value of the home and the amount of your home loan is your home equity.  The lender will usually only lend you 90% of the value, so with your down payment you will start with a 10% home equity. 


Understanding the home equity is an important factor when you are looking at a mortgage refinance.  If 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 have.  For instance, 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 will get $20,000 out in cash to use. 


If you 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 home 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 quickly so that you will be able to have it there if you need to access it in the future.