Understanding the concept of home equity

Not many know and understand the concept of home equity. And truth is that home equity loans are probably the cheapest source of finance out there. Many do not know that they can benefit from the equity they have built on their home by getting home equity loans instead of expensive unsecured personal loans, pay day loans or other financial products.

Provided that you know exactly how home equity works and how it guarantees home equity loans and lines of credit. Most of the drawbacks that these loans may have just fade away if you are responsible enough to prepare for unexpected expenses. And then, you can enjoy from inexpensive financing that you would not be able to get other way.

Home Equity

Equity is the remaining value of your property that can be used for further guaranteeing additional loans. If your property has no liens or mortgages, then the equity on your home is exactly 100% of the home value. This figure may be calculated according to the purchase price or, if some time has passed, a revaluation must be done.

However, in most cases, properties have at least mortgage loan attached to them. Thus, the equity on your home is the difference between the home value and the amount of outstanding debt that the property is guaranteeing at the time. This remaining value can be used as collateral for additional loans that have similar loan terms as home loans.

For example: If you own a property worth $100,000 with no liens or mortgages, then, the equity on your home is $100,000, the 100% of the price of the property. However, if you have a mortgage on your home with $60,000 of debt remaining, the equity on your home is $40,000, the 40% of the home value. This number is calculated by subtracting the outstanding debt amount to the purchase price or the valuation price of the property.

Equity Financing And Percentages

There is an additional complexity when it comes to home equity loans. In an Ideal scenario, you could get to finance up to 100% of your home equity or 100% of your home value combining your mortgage loan and any home equity loans. However, few lenders are willing to lend up to 100% of the value of the property (though some lend even more).

Instead, most lenders draw a line at an 85%. Thus, you can only get 85% financing; but 85% of what? And that’s another problem. Some lenders will define the credit limit on the 85% of the remaining equity on your home, but other will define it on the 85% of the home value. Thus, depending on the lender, the amount of money you can get differs.

For example: Say you have a property worth $100,000 and your current mortgage stands in $50,000. If the limit is 85% of the home value, then the amount of money you can get with your home loan and your home equity loan combined is $85,000, thus, you can withdraw up to $35,000 with a home equity loan.

But if the limit is fixed on the 85% of the home equity, then, you can obtain up to 85% of the remaining equity on your home ($50,000). Thus, you could obtain up to $42,500 which is a significantly higher amount. That being said, you should pay attention to the loan terms when requesting loan quotes from different lenders as what you can get out of a home equity loan differs from one lender to another.