Home Equity Loan Advisor

If you’re new to the area of home equity, the concepts and jargon can be confusing. So let’s start with some home equity loan basics.

It’s useful to begin by understanding of the concept of equity. This is simply the difference between the current value of your house and how much is left on your mortgage. If your house has gone up in value by $50,000 since you bought it, this has increased your equity by $50,000. Similarly, if you have paid off $10,000 in principal from your mortgage, this too is equity.

The value of your home is measured by an outside appraiser hired by the bank, so you often won’t know exactly how much equity you have available until you start the process of getting a loan.

Another home equity loan basic is the loan-to-value ratio. This tells you how much of your equity you can tap into. Because they want to protect themselves, most lenders today won’t let you use all the equity you may have available in your house. Banks look at your income, credit rating, and the amount of your outstanding debt when determining how much to lend you. Most lenders won’t go higher than 85% of the appraised value of your house minus what’s left on your first mortgage.

Finally, you’ll need to understand collateral and how it can affect you. When you take out a home equity loan, you are pledging the value of your house as collateral. You are essentially telling the bank “I will repay my debt on time, or you can take my house.” This may put your house at risk if you cannot afford your monthly loan payments.

Some home equity debt, particularly home equity lines of credit (HELOC) come with a large final payment, called a balloon. If you’re facing a balloon payment, you may need to borrow more money to pay off this debt. If you don’t qualify for refinancing because your credit score has dropped, you could be putting your house in jeopardy.

HELOCs often have a fixed period of time when you can make withdrawals from your account. This is known as a draw period. Once your draw period ends, you have the option of renewing your line of credit, but if you no longer qualify you may be required to pay off the entire outstanding balance of your loan. Each plan is different, so be sure to ask your lender about this.