Home Equity FAQ

Two lending options available to homeowners are home equity loans and home equity lines of credit. Each of these options offers a unique lending solution based on a homeowner's equity. Home equity loans and credit lines are not the only lending options available to homeowners, so they should be carefully considered before contacting a bank or lending institution regarding financial options.

Two lending options available to homeowners are home equity loans and home equity lines of credit. Each of these options offers a unique lending solution based on a homeowner's equity. Home equity loans and credit lines are not the only lending options available to homeowners, so they should be carefully considered before contacting a bank or lending institution regarding financial options.

What is Equity?

Equity is the amount of money or value that has been built in a property. The way that equity is computed is by subtracting the unpaid amount of the mortgage and any other debts from the fair market value of the property. As a mortgage is paid off, the amount of equity in the property increases until the point where the loan is paid in full and the amount of equity in the property is 100 percent. As an example, if $20,000 has been paid off on a mortgage totaling $100,000, then the amount of equity in the home is 20 percent versus an 80 percent debt.

How are Loans and Lines of Credit Different?

Home equity loans allow for a set amount of money to be borrowed with a fixed interest rate. This option suits homeowners who need a lot of money at one time. On the other hand, home equity lines of credit allow you to draw on your equity so that it may be used whenever it is needed. The line of credit can be borrowed from and paid back over time, and no monthly payments are made until the money is actually used. Home equity loans are useful for home improvements and other major expenses such as debt consolidation. Home equity lines of credit are useful for college tuition, emergency repairs, medical bills and other expenses that may or may not arise.

What are the Benefits?

The primary benefit of these home equity loans and lines of credit is that money can be acquired to help meet a variety of personal financial goals. Homeowners are allowed to tap into the equity that they have acquired in a property, taking advantage of lower interest rates than what could be acquired through other forms of lending.