Home equity is the value of your house, determined by the market, after the subtraction of any existing debts –like mortgages. Naturally, as debt decreases, the equity of your home increases.
Equity is considered to be an asset since it allows for individuals to borrow against it. These loans can be traditional in nature or advanced, depending on your need and preferences. There are 3 basic ways through which you can borrow against home equity:
- Second Mortgage
A second mortgage is a type of loan that allows you use your home as collateral. You obtain the loan after promising your house in case of a failure to repay. If the market value of your house increases, your equity increases. This means that the lender is more likely to give you the loan since the profit you might get from selling your house may be more than enough to pay off your debt.
Private second mortgages allow you to borrow a large sum of money with lower rates of interest and, depending on your case, you might even get a tax deduction for any interest paid.
- Equity Line of Credit
The equity line of credit is similar to second mortgages in nature. They allow you to borrow against the market value of your home. The only difference is in regards to the repayment methods. With equity line of credits, there are two time periods through which you pay the lender back; draw period and repayment period.
Draw period allows you to withdraw whatever quantity of money, within the confines of equity, you want. You interest rate will depend on the amount that you borrow. Once this period is over, the repayment period begins according to which you will have to make monthly payments. These will increase in time because you have to pay back the original amount plus the rate of interest.
The last way through which you can borrow against home equity is through refinancing. This is the process through which you replace an already existing mortgage with a new one. Majority of the times, people refinance because they want to reduce the amount of monthly payments they have to give. Additionally, refinancing extends certain benefits like lower rates of interest, options between fixed rates or adjustable rates and has the option of a cash-out which can aid needs like renovation or repairs of the house.
In order to opt for a refinance, all you have to do is gather your financial documents, fill out an application, submit it along with it’s fees and carry out research so that you know which deals to consider and which ones to let go off.