How to Understand What is Home Equity

Many individuals have the question “what is home equity.” Purchasing a home is an investment. Over time, your home will appreciate, which is called building equity. Lenders will allow you to borrow against that equity with a home equity loan or line of credit. And depending on your situation, you may be able to deduct the interest on your home equity loan or line of credit, which provides substantial tax benefits. Here’s a quick guide to understanding “what is home equity.”

Difficulty: Moderate

Instructions

1. The first step in the process of securing a home equity loan or line of credit is talking with your lender. They will often order a complimentary appraisal to determine if you have equity in your home.

2. Determine how much equity you have in your home. When answering the question “what is home equity,” try evaluating your appraisal. Take the appraised amount of your home, and subtract the amount you owe on your loan. This equals the equity you have in your home. For example, if your appraised value is $200,000 and your loan value is $160,000, you have $40,000 of equity in your home.

3. Find the best rate on a home equity loan or line of credit. You can compare over 100 rates at sites like Bank Rate. Print out the best rate, and ask your current lender to match the rate.

4. Determine if you want a home equity loan or line of credit. Many individuals wonder “what is home equity loan”? A home equity loan is a loan against the equity in your home with a fixed rate. A home equity line of credit has a rate that adjusts with the prime rate.

5. Decide if taking out a home equity loan or line of credit is right for you. These loans can be helpful in taking care of large household repairs, or making improvements before selling a house.

Tips & Warnings

• Talk with your lender about your question on “what is home equity.” They can often take a look at your unique situation and assist in determining if it makes sense.
• Be careful about hidden fees. Taking out a home equity loan or line of credit may come with fees. These including closing costs, appraisal fees and annual service charges. Ask your lender which of these fees will apply to your account to make the best decision.