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If you’ve been paying your mortgage for a while, you’ve probably built up some equity in your home.

Maybe you’ve heard of a home equity line of credit or home equity loan, but you might not understand why it may be an option for you. Here’s an introduction to home equity and how you can use it to finance your life events.

What is Equity in a Home?

The definition of home equity is the difference between how much your home is currently worth (its market value) and how much you owe on your mortgage(s). Here’s a quick example to help you figure out how much equity you have:

  • Your Current Home Value: $200,000
  • Minus Your Current Mortgage Balance: $150,000
  • Equals Your Home Equity: $50,000
How You Can Use Home Equity

Mortgage lenders allow you to borrow against your home’s equity, using your home as collateral. These home equity loans are usually in addition to a mortgage, which is why they are sometimes referred to as second mortgages. The general guideline is that you can borrow up to about 85% of your home’s equity. You can use the proceeds of a home equity loan for a variety of purposes, including:

  • Home improvements
  • Debt consolidation
  • Weddings
  • Education and College
  • Vacations
  • Major life events
How Does a Home Equity Line of Credit Work?

With a home equity line of credit, or HELOC, you can use loan proceeds up to your total limit as needed during the draw period. This is similar to a credit card, in that once you pay off what you’ve borrowed, you can borrow more. For example, if you take out a $6,000 HELOC and then pay $3,500 back toward the principal, you’ll have $2,500 in available credit. With a HELOC, the interest rate is variable and your interest-only payments are based on the outstanding balance on the account.

What is a Home Equity Loan?

A home equity loan allows you to borrow a lump sum of money, similar to a conventional mortgage. With a home equity loan, your interest rate is typically fixed, and your repayment amount is the same each month. In contrast to a HELOC, you can’t re-access money once you’ve paid back the principal.

How to Get a Home Equity Loan or Home Equity Line of Credit

When applying for a loan, lenders will look at your debt-to-income ratio, or DTI, to figure out how much of your income is already promised to other lenders. This factor helps lenders determine what you can afford for this type of loan. Typically, the lower your DTI, the greater chance you have to qualify for a home equity loan or HELOC. Mortgage lenders will also consider your loan-to-value ratio, or LTV. This is the overall amount you will owe on your mortgage divided by your home’s current market value. To make sure your home’s value is accurate, you’ll need an appraisal. Typically, the lower the ratio, the better your chances of qualifying. LTV ratios generally need to be 80% or below to qualify.

Building up equity in your home is like putting money in the bank for a rainy day. If you need extra money to pay for your children’s education, make home improvements, or pay for unforeseen expenses, tapping into your home equity could be a good option. To see how much you may qualify for, use our loan calculator, or check out our home equity loans and HELOC rates. And come in to any of the First American Bank branches for more information in person. We are always here and available for any questions you may have.