Home Equity 101: What Is it & How Does It Work
Home equity is a term that’s used to describe how much of your home you actually own. This can seem confusing to new homeowners – after all, if you’ve closed the house, it’s already your home, isn’t it? But things are a little more complicated when we factor in mortgages and the lenders that helped finance your purchase.
In this article, we’ll make it easier to answer questions like “what is home equity?” and “how does home equity work?” By the end, you should have a better understanding of what home equity is referring to and how you can leverage it towards getting the funding you need.
What is home equity?
As covered before, home equity refers to how much of your home you’ve actually paid for. Since the majority of homeowners purchase their homes with the help of a mortgage, they acquire their home in exchange for a loan from a financial institution or lender. Over time, they make regular payments towards their loan and slowly pay off their debt, which means they’re also slowly paying off the overall cost of their home.
Home equity is a measure of how much of the overall cost the homeowner has already paid. In short, homeowners that have been paying off their mortgage for years will have much more home equity than someone who’s only recently bought their home. Of course, this also depends on other factors, such as the size of the down payment that was made at the time of purchase.
What is equity on a house?
To get into more detail, equity on a house refers to how much of your home’s total value you’ve already paid for against your mortgage. This amount is usually measured as a percentage known as the Loan-to-Value (LTV) ratio. The LTV is a factor taken into account by any lenders that provide home equity financing, and it’s a simple way of knowing how much equity you’ve built up.
How does home equity work?
Home equity works to provide financial institutions, banks, and lenders an idea of the inherent value you’ve saved in your home. Homes can be viewed as a form of investment—while paying back your mortgage, you’re slowly building an asset as you slowly own more and more of your home. Home equity is the total amount of the asset you’ve saved up, and like any other asset, it can be leveraged to benefit you when you need it.
Home equity also allows you to access the value of your home without having to sell it. This can be great for homeowners that need financing but also need their home for residential purposes. It can also be a great option for individuals and families that can’t afford to take out a traditional loan through the big banks.
How can home equity be used?
You can use your home equity to acquire funding for your needs through several methods, including business ventures, consolidating debt, renovating a home, and more. You can also choose from a few different types of home equity financing options, but the two best options are the standard home equity loan and home equity line of credit (HELOC).
Home equity loan
This loan allows you to borrow a specific amount of money against your home all at once. This is a good option for situations where you need a lot of funds immediately, like for a down payment or to pay for a renovation project.
Home equity line of credit (HELOC)
A HELOC lets you withdraw money as needed against a maximum amount, which is determined by your total home equity and the agreement you have with the lender. Essentially, it works like a credit card, where you can take out money and pay it back to free up your credit according to your requirements.
Why should I use home equity financing?
Home equity financing is the way to go when you need to access funds in an emergency or for a specific reason, but don’t want to take on a high-interest loan or sell your house to do so.
Home equity financing is always a better option than most other personal loans, especially credit cards, where you pay very high interest rates on borrowed amounts. Compared to them, home loan equity financing is much more affordable, to the point that you can use a home equity loan to consolidate your debt. By borrowing funds from your home equity and paying off your miscellaneous loans, you can put all your debt in one place against a very manageable interest rate.
Many banks and lending institutions will also refuse applicants for traditional loans because of varying factors such as age, credit history, or income requirements. Even some private lenders may bar would-be borrowers from financing because of these criteria. But at Alpine Credits, we don’t look at age, income, or credit history—we only look at the home equity you can access. This simplifies our approval process, and means that we can get you approved within 24 hours for your home loan equity financing.