How Home Equity Works

What is Home Equity?

Your home equity is the appraised value remaining in your home after you subtract the remaining balance you owe on your existing home mortgage(s). It can be thought of as the part of the home you actually own instead of the bank: the part you’ve paid for so far.

It isn’t difficult to build equity in your home, and chances are if you’ve owned your home for a while and have been making your regular mortgage payments, you probably have built a considerable amount of home equity already. Though the housing market rises and falls in cycles, the overall tendency is consistently upward. In other words, property values tend to rise over the long term.

How Can Home Equity Be Used?

Once you have equity in your home, you can start to use it to fund nearly anything you want  or need. Having equity in your home puts you in a powerful position, as you can use that equity to qualify for credit and borrow money. Buy a new car, take that dream vacation, fund a college education, make renovations and improvements to your home. Whether to pay for an emergency or finance a dream, there are two primary ways to tap into the wellspring that is your home equity: a home equity loan and a home equity line of credit.

What Are Home Equity Interest Rates Like?

A good question to ask before borrowing money from any source is: how much is it going to cost in the long run? Because your home is being used as collateral on the home equity loan or home equity line of credit, the risk for the lender is considerably lower, and therefore interest rates on home equity loans and home equity lines of credit are usually lower than the average interest rate on a credit card.

Home equity loans and home equity lines of credit are, however, usually higher than the interest rate on the average fixed rate mortgage. And in general, home equity loans usually have lower interest rates than home equity lines of credit.

What Are Some of the Other Benefits of Home Equity?

As if borrowing money weren’t advantage enough, home equity offers a bevy of other benefits as well, including:

* tax advantages (in many cases, interest paid on home equity loans and lines of credit are tax deductible)

* you can use equity to build more equity (if you tap into home equity to make improvements to your home, you raise your home’s value, thereby building more equity)

* debt consolidation (you can use it to pay off higher priced loans or debt)