Home equity line of credit (HELOC)

A home equity line of credit is a revolving line of credit secured by the borrower’s home. A lien is created against the borrower’s home. Since the borrower’s home is put up as collateral, the HELOC is considered lower risk for the lender than unsecured credit such as credit cards. This means that you can often negotiate a pretty sweet deal for a HELOC and you might be able to get a HELOC even if your credit report isn’t stellar. Of course, this will largely depend on how much equity there is in your home and if the market value is project to go up or down.

home equity

The interest rate for a home equity line of credit is normally adjustable. Some lenders offer a home equity line of credit where you only have to pay the interest each month – paying down the principal is optional. However, there will usually be some fine print stating that if the market value of your home goes below a certain point, you must pay off the principal.

 

Using a HELOC to finance home improvements is popular, especially for improvements that will actually increase the market value of the home. As the market value goes up, you might be offered an even bigger HELOC and can embark on an even bigger home improvement project. However, it is also common to use money from a HELOC to pay for things that aren’t home improvements, such as medical bills or consumer goods.

 

Before you apply for or accept a home equity line of credit, check out any fees and costs associated with getting it, having it and using it. You can expect to pay a fee even if you don’t utilize the credit.

equityWhat is equity in real estate?

In real estate, equity is the difference between the market value of the real estate and the liabilities of it (mortgage loans and other liens).

 

Positive equity = market value is bigger than the liabilities

 

Negative equity = market value is smaller than the liabilities

Examples of how equity can change

2010: You buy a house. Market value is $300,000. You have a $50,000 cash down-payment and a $250,000 mortgage loan with the house as collateral. The mortgage loan is interest only, amortization non-mandatory, but you plan on amortizing quite a bit. —> Equity is $50,000.

 

2015: You have paid down your mortgage loan to $200,000. Market value of the house is still $300,000. —> Equity is $100,000.

 

2017: Your neighborhood has become really popular. Your house is now valued at $450,000. You have paid down your mortgage loan to $180,000. —> Equity is $270,000.

 

2018: You build a studio apartment on top of the garage. You finance this with a $40,000 second mortgage. First mortgage is $170,000. Market value of the home is still $450,000. —> Equity is $240,000.

 

2019: Your house with the new studio apartment is valued at $510,000. You have paid down your first mortgage to $165,000 and your second mortgage to $35,000. —> Equity is $310,000.

 

2022: The national house market is dwindling. Your house is now valued to just $400,000. Your have paid down your first mortgage to $160,000 and your second mortgage to $10,000. —> Equity is $230,000.