How It Works
Learn the basics of home equity loans. We’ll explain what they are and how to assess your home’s value accurately here.
Basics of Home Equity Loans
A home equity loan is a secured loan that uses your house as collateral. If your home is worth more than the outstanding balance on your mortgage, you might qualify for such a loan. Lenders usually determine the value of your home equity by subtracting the debts against your home from its current appraised value. For instance, if your home is worth $200,000 and you owe $150,000 on your mortgage loan, then your home equity is $50,000. Most lenders do not give loans of 100% of your home equity, though, because this is too risky. You will probably instead qualify for a loan that is about 80% of the value of your home equity. On the other hand, some lenders issue loans of up to 110% of your home equity’s value, depending on your credit.
Determining a Realistic Home Value
Before you apply for home equity loans, you will need to have a realistic idea of what your home is worth. One important factor to examine when figuring this number out is how the real estate market is performing in your area. Check local home sales to see how houses like yours are selling, as this will have a profound impact on your home’s worth. For the most accurate picture of what your home is worth, you will need to have an independent appraisal done. Independent appraisals usually cost a few hundred dollars, but this is money well spent since your lender will probably require one anyway when you apply for your home equity loan. The appraiser will look at your home and local market trends to give you an estimate of your home’s value.
Interest Rates & Home Equity Loans
If a lot of your financial worth is tied up in your home, a home equity loan can give you a way to turn some of that capital into cash without having to sell your house. Below we’ve listed a few of the interest rate benefits of home equity loans:
- Competitively low rates. Because equity loans are secured by a physical piece of property, your home, they can offer very competitive interest rates. Typically, these rates are lower than those of credit cards or personal loans.
- Tax breaks. A home equity loan is basically another mortgage, which means the interest expenses on the loan are tax deductible. These deductions are usually capped at $100,000, depending on the amount of equity in your home. Ask your tax advisor for further information.
- Rate flexibility. A traditional home equity loan has a fixed rate, so you will lock in the same interest rate for the life of the loan when you close the deal. If you would like to take advantage of falling rates, you can also get a home equity line of credit, which offers a variable interest rate.