{"id":15232,"date":"2020-04-04T11:11:00","date_gmt":"2020-04-04T18:11:00","guid":{"rendered":"http:\/\/www.roryc.ca\/blog\/?p=15232"},"modified":"2020-04-04T07:10:23","modified_gmt":"2020-04-04T14:10:23","slug":"understanding-the-home-equity-%e2%80%a2-pros-cons-of-home-equity-loans","status":"publish","type":"post","link":"https:\/\/www.roryc.ca\/blog\/2020\/04\/understanding-the-home-equity-%e2%80%a2-pros-cons-of-home-equity-loans\/","title":{"rendered":"Understanding The Home Equity \u2022 Pros & Cons of Home Equity Loans"},"content":{"rendered":"

What is equity?<\/strong><\/p>\n

You\u2019ll often hear the term equity when it comes to homeownership, but you may not even know what that means even if you already own a home. The amount of money you receive when you sell your house, minus any debt associated with it, is equity. When looking at it from an investment point of view, the owner of the asset (probably you in this case) is referred to as a stakeholder. There are two types of equity: book value and market value. Equity calculations occur most often in businesses and homes.<\/p>\n

Calculating the difference between an asset and its liabilities determines the equity\u2019s book value. An equity\u2019s market value is based on the valuation of investors, or its current share price if you\u2019re calculating the market value for a business. For a home, fair market value is typically what people in the consumer marketplace are willing to pay for your house.<\/p>\n

Understanding home equity<\/strong><\/p>\n

Say you want to determine how much equity you have in your own home. You can take its current value and subtract the amount you still owe. For example, if your home\u2019s value is currently $130,000 and you still owe $80,000, you have $50,000 of equity. Two factors affect your home\u2019s equity :<\/p>\n

\u2022 If appreciation occurs due to home\/property improvements or inflation
\n\u2022 Paying down the principal that you owe on your original mortgage<\/p>\n

When you make a down payment during your initial purchase, that helps bring down the amount you owe on the mortgage. Down payments are both a portion of the home\u2019s total selling price, as well as your initial equity stake. Many mortgages, like a VA loan or USDA-backed loan, don\u2019t require a down payment, however, it\u2019s common for homeowners to put down between 3-5%.<\/p>\n

The loan interest you have on your mortgage affects how quickly you can build equity. Your loan interest is a percentage of your total balance, which most pay monthly until the end of the mortgage term. Loan collateral is when you take out a loan and, in the case of real estate, the home becomes collateral. This reduces a lender\u2019s risk; if the loan goes into default they can sell the collateral to recoup costs.<\/p>\n

The term lien means you have a legal right or claim against a property. The first time a home lien happens is when you obtain the original mortgage. In that scenario, the lien is helpful because the home becomes loan collateral and you can build equity. Keeping up with your mortgage payments helps ensure any other lien doesn\u2019t attach to the loan. So make sure you\u2019re paying it on time to keep any liens away.<\/p>\n

What happens to my equity if my home increases in value?<\/strong><\/p>\n

Let\u2019s take the earlier example of your home being currently worth $130,000. You owe $80,000, so there is $50,000 in equity. Now, assume that the initial cost of your home was $100,000, and you made a 10% down payment at purchase. That percentage is also known as your equity stake. If you don\u2019t incur any additional debt on your home, its equity will continue increasing as you make payments and its value increases.<\/p>\n

$100,000 \u2013 10% ($10,000) = $90,000 (original amount of the loan before making payments)
\n\u2022 Original loan : $90,000
\n\u2022 Payments to date : $10,000 ($90,000 \u2013 $10,000 = $80,000 owed)
\n\u2022 Value of home : $130,000
\n\u2022 Equity : $50,000 ($130,000 \u2013 $80,000 = $50,000 equity)<\/p>\n

Tips on how to build home equity<\/strong><\/p>\n

There are lots of ways to build equity, including one that requires no work at all. When your property value increases due to rising prices in the housing market, you\u2019re building home equity. Here are some additional ways you can build home equity :<\/p>\n

\u2022 Lowering your mortgage balance : The more you pay against your mortgage\u2019s principal, the more equity you\u2019ll have. Just make sure there are no pre-payment penalties.
\n\u2022 Making larger mortgage payments : Each time you pay extra on your mortgage and apply that difference to the loan\u2019s principal, you\u2019re building equity.
\n\u2022 Change the payment schedule : By making 26 half-payments instead of 12 full payments, you reduce the term of your loan, saving on interest and building equity faster.
\n\u2022 Refinance the terms : If you opt to refinance your loan to a shorter-term 15-year loan, you\u2019ll have higher payments but you will build equity faster than with a traditional 30-year loan.
\n\u2022 Make improvements : Some home improvements increase the property\u2019s worth and thereby your equity. But only certain types of improvements will pay off, so research for your area accordingly. And don\u2019t forget curb appeal.
\n\u2022 Keep it maintained : Keeping up with regular repairs and maintenance can increase your home\u2019s worth when it comes time to sell, which results in higher equity.<\/p>\n

Home equity loans<\/strong><\/p>\n

One of the most beneficial aspects of a mortgage is the ability to borrow against your equity. You can do that with a lump-sum loan or home equity line of credit.<\/p>\n

How does a home equity loan work?<\/strong><\/p>\n

There are two types of home equity loans: lump-sum loans and the home equity line of credit.
\n\u2022 Lump-sum home equity loan: A lump-sum home equity loan means lenders are allowing you to borrow a lump-sum of money against your existing equity. Because they fund in a lump sum, they\u2019re similar to a personal loan.<\/p>\n

\u2022 Home equity line of credit (HELOC): A HELOC is a loan where the lender qualifies you for a revolving line of credit against a percentage of your home equity. This loan works similarly to a credit card whereby you carry the balance from month-to-month for the amount you\u2019re allowed to borrow against your home\u2019s equity.<\/p>\n

Qualifying for a home equity loan<\/strong><\/p>\n

Qualifying for a lump-sum home equity loan means the lender looks at your credit history, income, the home\u2019s current value and your debt-to-income ratio. When you\u2019re trying to qualify for a HELOC, you must have at least 15-20% of your home\u2019s value in equity. That determination occurs following an appraisal. You must also have a debt-to-income ratio that does not exceed roughly 40% (or a bit higher) and a credit score above 620.<\/p>\n

Pros and cons of home equity loans<\/strong><\/p>\n

Pros :
\n\u2022 Easy qualification : If a lender knows they can use your home as collateral they are more likely to qualify you for and approve your application.
\n\u2022 Lower interest rates : Even if the home equity loan is challenging to get, you may find it has lower interest rates.<\/p>\n

Cons :
\n\u2022 Risk : If you cannot make your loan payments, you risk the home going into foreclosure.
\n\u2022 Limitations : If you want to sell your home, you must pay off your home equity debt first.<\/p>\n

Frequently Asked Questions<\/strong><\/p>\n

What is equity and how do I find out my home equity?
\nEquity is the amount of money an asset owner receives when they sell their house, minus any debt associated with it. To find your home equity, your first step is getting an appraisal. Then, take the value of the appraisal and subtract it from the amount you still owe on your mortgage.<\/p>\n

Is it a good idea to take equity out of your house?
\nIf you need to make home improvements, cover costs for college, consolidate debt, obtain emergency expenses or secure long-term investments, then you may want to apply for a home equity loan (assuming, of course, you can afford the increased mortgage payment).<\/p>\n

What credit score do you need to get a home equity loan?
\nYou have a better chance of qualifying if your credit score is 700 or above.<\/p>\n

Which is better to get\u2014a home equity loan or personal loan?
\nIf you need a substantial amount of funds, it\u2019s more challenging to get a personal loan. A home equity loan allows you to repay over a longer-term as well.<\/p>\n

Are there closing costs on a home equity loan?
\nThough rates differ from lender to lender, expect to pay between 2-5% of the loan in closing costs. However, it isn\u2019t uncommon for lenders to waive these fees.<\/p>\n

What is Home Equity and How Does It Work?<\/a> by Jenn Greenleaf | Freshome<\/p>\n","protected":false},"excerpt":{"rendered":"

What is equity? You\u2019ll often hear the term equity when it comes to homeownership, but you may not even know what that means even if you already own a home. … [read more<\/a>]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[9],"tags":[],"class_list":["post-15232","post","type-post","status-publish","format-standard","hentry","category-mortgage"],"yoast_head":"\nUnderstanding The Home Equity \u2022 Pros & Cons of Home Equity Loans • Rory C Real Estate | Oakwyn Realty<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.roryc.ca\/blog\/2020\/04\/understanding-the-home-equity-\u2022-pros-cons-of-home-equity-loans\/\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:title\" content=\"Understanding The Home Equity \u2022 Pros & Cons of Home Equity Loans • Rory C Real Estate | Oakwyn Realty\" \/>\n<meta name=\"twitter:description\" content=\"What is equity? You\u2019ll often hear the term equity when it comes to homeownership, but you may not even know what that means even if you already own a home. … [read more]\" \/>\n<meta name=\"twitter:creator\" content=\"@RoryClipsham\" \/>\n<meta name=\"twitter:site\" content=\"@RoryClipsham\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"Rory Clipsham\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"7 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\\\/\\\/schema.org\",\"@graph\":[{\"@type\":\"Article\",\"@id\":\"https:\\\/\\\/www.roryc.ca\\\/blog\\\/2020\\\/04\\\/understanding-the-home-equity-%e2%80%a2-pros-cons-of-home-equity-loans\\\/#article\",\"isPartOf\":{\"@id\":\"https:\\\/\\\/www.roryc.ca\\\/blog\\\/2020\\\/04\\\/understanding-the-home-equity-%e2%80%a2-pros-cons-of-home-equity-loans\\\/\"},\"author\":{\"name\":\"Rory Clipsham\",\"@id\":\"https:\\\/\\\/www.roryc.ca\\\/blog\\\/#\\\/schema\\\/person\\\/0672b9777e67473b9bd9247df49499c7\"},\"headline\":\"Understanding The Home Equity \u2022 Pros & Cons of Home Equity Loans\",\"datePublished\":\"2020-04-04T18:11:00+00:00\",\"mainEntityOfPage\":{\"@id\":\"https:\\\/\\\/www.roryc.ca\\\/blog\\\/2020\\\/04\\\/understanding-the-home-equity-%e2%80%a2-pros-cons-of-home-equity-loans\\\/\"},\"wordCount\":1345,\"commentCount\":0,\"publisher\":{\"@id\":\"https:\\\/\\\/www.roryc.ca\\\/blog\\\/#\\\/schema\\\/person\\\/0672b9777e67473b9bd9247df49499c7\"},\"articleSection\":[\"Mortgage\"],\"inLanguage\":\"en-CA\",\"potentialAction\":[{\"@type\":\"CommentAction\",\"name\":\"Comment\",\"target\":[\"https:\\\/\\\/www.roryc.ca\\\/blog\\\/2020\\\/04\\\/understanding-the-home-equity-%e2%80%a2-pros-cons-of-home-equity-loans\\\/#respond\"]}]},{\"@type\":\"WebPage\",\"@id\":\"https:\\\/\\\/www.roryc.ca\\\/blog\\\/2020\\\/04\\\/understanding-the-home-equity-%e2%80%a2-pros-cons-of-home-equity-loans\\\/\",\"url\":\"https:\\\/\\\/www.roryc.ca\\\/blog\\\/2020\\\/04\\\/understanding-the-home-equity-%e2%80%a2-pros-cons-of-home-equity-loans\\\/\",\"name\":\"Understanding The Home Equity \u2022 Pros & Cons of Home Equity Loans • Rory C Real Estate | Oakwyn Realty\",\"isPartOf\":{\"@id\":\"https:\\\/\\\/www.roryc.ca\\\/blog\\\/#website\"},\"datePublished\":\"2020-04-04T18:11:00+00:00\",\"breadcrumb\":{\"@id\":\"https:\\\/\\\/www.roryc.ca\\\/blog\\\/2020\\\/04\\\/understanding-the-home-equity-%e2%80%a2-pros-cons-of-home-equity-loans\\\/#breadcrumb\"},\"inLanguage\":\"en-CA\",\"potentialAction\":[{\"@type\":\"ReadAction\",\"target\":[\"https:\\\/\\\/www.roryc.ca\\\/blog\\\/2020\\\/04\\\/understanding-the-home-equity-%e2%80%a2-pros-cons-of-home-equity-loans\\\/\"]}]},{\"@type\":\"BreadcrumbList\",\"@id\":\"https:\\\/\\\/www.roryc.ca\\\/blog\\\/2020\\\/04\\\/understanding-the-home-equity-%e2%80%a2-pros-cons-of-home-equity-loans\\\/#breadcrumb\",\"itemListElement\":[{\"@type\":\"ListItem\",\"position\":1,\"name\":\"Home\",\"item\":\"https:\\\/\\\/www.roryc.ca\\\/blog\\\/\"},{\"@type\":\"ListItem\",\"position\":2,\"name\":\"Understanding The Home Equity \u2022 Pros & Cons of Home Equity Loans\"}]},{\"@type\":\"WebSite\",\"@id\":\"https:\\\/\\\/www.roryc.ca\\\/blog\\\/#website\",\"url\":\"https:\\\/\\\/www.roryc.ca\\\/blog\\\/\",\"name\":\"Rory C Real Estate | Oakwyn Realty\",\"description\":\"Rory C Real Estate Updates | Home Selling & Buying\",\"publisher\":{\"@id\":\"https:\\\/\\\/www.roryc.ca\\\/blog\\\/#\\\/schema\\\/person\\\/0672b9777e67473b9bd9247df49499c7\"},\"potentialAction\":[{\"@type\":\"SearchAction\",\"target\":{\"@type\":\"EntryPoint\",\"urlTemplate\":\"https:\\\/\\\/www.roryc.ca\\\/blog\\\/?s={search_term_string}\"},\"query-input\":{\"@type\":\"PropertyValueSpecification\",\"valueRequired\":true,\"valueName\":\"search_term_string\"}}],\"inLanguage\":\"en-CA\"},{\"@type\":[\"Person\",\"Organization\"],\"@id\":\"https:\\\/\\\/www.roryc.ca\\\/blog\\\/#\\\/schema\\\/person\\\/0672b9777e67473b9bd9247df49499c7\",\"name\":\"Rory Clipsham\",\"image\":{\"@type\":\"ImageObject\",\"inLanguage\":\"en-CA\",\"@id\":\"https:\\\/\\\/www.roryc.ca\\\/blog\\\/wp-content\\\/uploads\\\/2019\\\/10\\\/RoryC-white-w-tagline.jpg\",\"url\":\"https:\\\/\\\/www.roryc.ca\\\/blog\\\/wp-content\\\/uploads\\\/2019\\\/10\\\/RoryC-white-w-tagline.jpg\",\"contentUrl\":\"https:\\\/\\\/www.roryc.ca\\\/blog\\\/wp-content\\\/uploads\\\/2019\\\/10\\\/RoryC-white-w-tagline.jpg\",\"width\":504,\"height\":504,\"caption\":\"Rory Clipsham\"},\"logo\":{\"@id\":\"https:\\\/\\\/www.roryc.ca\\\/blog\\\/wp-content\\\/uploads\\\/2019\\\/10\\\/RoryC-white-w-tagline.jpg\"},\"sameAs\":[\"http:\\\/\\\/www.roryc.ca\\\/\",\"https:\\\/\\\/www.facebook.com\\\/pg\\\/BurnabyandCoquitlamHomes\\\/about\\\/?ref=page_internal\",\"https:\\\/\\\/www.instagram.com\\\/roryclipshamhomes\\\/\",\"https:\\\/\\\/x.com\\\/RoryClipsham\"]}]}<\/script>\n<!-- \/ Yoast SEO plugin. -->","yoast_head_json":{"title":"Understanding The Home Equity \u2022 Pros & Cons of Home Equity Loans • Rory C Real Estate | Oakwyn Realty","robots":{"index":"index","follow":"follow","max-snippet":"max-snippet:-1","max-image-preview":"max-image-preview:large","max-video-preview":"max-video-preview:-1"},"canonical":"https:\/\/www.roryc.ca\/blog\/2020\/04\/understanding-the-home-equity-\u2022-pros-cons-of-home-equity-loans\/","twitter_card":"summary_large_image","twitter_title":"Understanding The Home Equity \u2022 Pros & Cons of Home Equity Loans • Rory C Real Estate | Oakwyn Realty","twitter_description":"What is equity? You\u2019ll often hear the term equity when it comes to homeownership, but you may not even know what that means even if you already own a home. … [read more]","twitter_creator":"@RoryClipsham","twitter_site":"@RoryClipsham","twitter_misc":{"Written by":"Rory Clipsham","Est. reading time":"7 minutes"},"schema":{"@context":"https:\/\/schema.org","@graph":[{"@type":"Article","@id":"https:\/\/www.roryc.ca\/blog\/2020\/04\/understanding-the-home-equity-%e2%80%a2-pros-cons-of-home-equity-loans\/#article","isPartOf":{"@id":"https:\/\/www.roryc.ca\/blog\/2020\/04\/understanding-the-home-equity-%e2%80%a2-pros-cons-of-home-equity-loans\/"},"author":{"name":"Rory Clipsham","@id":"https:\/\/www.roryc.ca\/blog\/#\/schema\/person\/0672b9777e67473b9bd9247df49499c7"},"headline":"Understanding The Home Equity \u2022 Pros & Cons of Home Equity Loans","datePublished":"2020-04-04T18:11:00+00:00","mainEntityOfPage":{"@id":"https:\/\/www.roryc.ca\/blog\/2020\/04\/understanding-the-home-equity-%e2%80%a2-pros-cons-of-home-equity-loans\/"},"wordCount":1345,"commentCount":0,"publisher":{"@id":"https:\/\/www.roryc.ca\/blog\/#\/schema\/person\/0672b9777e67473b9bd9247df49499c7"},"articleSection":["Mortgage"],"inLanguage":"en-CA","potentialAction":[{"@type":"CommentAction","name":"Comment","target":["https:\/\/www.roryc.ca\/blog\/2020\/04\/understanding-the-home-equity-%e2%80%a2-pros-cons-of-home-equity-loans\/#respond"]}]},{"@type":"WebPage","@id":"https:\/\/www.roryc.ca\/blog\/2020\/04\/understanding-the-home-equity-%e2%80%a2-pros-cons-of-home-equity-loans\/","url":"https:\/\/www.roryc.ca\/blog\/2020\/04\/understanding-the-home-equity-%e2%80%a2-pros-cons-of-home-equity-loans\/","name":"Understanding The Home Equity \u2022 Pros & Cons of Home Equity Loans • Rory C Real Estate | Oakwyn Realty","isPartOf":{"@id":"https:\/\/www.roryc.ca\/blog\/#website"},"datePublished":"2020-04-04T18:11:00+00:00","breadcrumb":{"@id":"https:\/\/www.roryc.ca\/blog\/2020\/04\/understanding-the-home-equity-%e2%80%a2-pros-cons-of-home-equity-loans\/#breadcrumb"},"inLanguage":"en-CA","potentialAction":[{"@type":"ReadAction","target":["https:\/\/www.roryc.ca\/blog\/2020\/04\/understanding-the-home-equity-%e2%80%a2-pros-cons-of-home-equity-loans\/"]}]},{"@type":"BreadcrumbList","@id":"https:\/\/www.roryc.ca\/blog\/2020\/04\/understanding-the-home-equity-%e2%80%a2-pros-cons-of-home-equity-loans\/#breadcrumb","itemListElement":[{"@type":"ListItem","position":1,"name":"Home","item":"https:\/\/www.roryc.ca\/blog\/"},{"@type":"ListItem","position":2,"name":"Understanding The Home Equity \u2022 Pros & Cons of Home Equity Loans"}]},{"@type":"WebSite","@id":"https:\/\/www.roryc.ca\/blog\/#website","url":"https:\/\/www.roryc.ca\/blog\/","name":"Rory C Real Estate | Oakwyn Realty","description":"Rory C Real Estate Updates | Home Selling & Buying","publisher":{"@id":"https:\/\/www.roryc.ca\/blog\/#\/schema\/person\/0672b9777e67473b9bd9247df49499c7"},"potentialAction":[{"@type":"SearchAction","target":{"@type":"EntryPoint","urlTemplate":"https:\/\/www.roryc.ca\/blog\/?s={search_term_string}"},"query-input":{"@type":"PropertyValueSpecification","valueRequired":true,"valueName":"search_term_string"}}],"inLanguage":"en-CA"},{"@type":["Person","Organization"],"@id":"https:\/\/www.roryc.ca\/blog\/#\/schema\/person\/0672b9777e67473b9bd9247df49499c7","name":"Rory Clipsham","image":{"@type":"ImageObject","inLanguage":"en-CA","@id":"https:\/\/www.roryc.ca\/blog\/wp-content\/uploads\/2019\/10\/RoryC-white-w-tagline.jpg","url":"https:\/\/www.roryc.ca\/blog\/wp-content\/uploads\/2019\/10\/RoryC-white-w-tagline.jpg","contentUrl":"https:\/\/www.roryc.ca\/blog\/wp-content\/uploads\/2019\/10\/RoryC-white-w-tagline.jpg","width":504,"height":504,"caption":"Rory Clipsham"},"logo":{"@id":"https:\/\/www.roryc.ca\/blog\/wp-content\/uploads\/2019\/10\/RoryC-white-w-tagline.jpg"},"sameAs":["http:\/\/www.roryc.ca\/","https:\/\/www.facebook.com\/pg\/BurnabyandCoquitlamHomes\/about\/?ref=page_internal","https:\/\/www.instagram.com\/roryclipshamhomes\/","https:\/\/x.com\/RoryClipsham"]}]}},"_links":{"self":[{"href":"https:\/\/www.roryc.ca\/blog\/wp-json\/wp\/v2\/posts\/15232","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.roryc.ca\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.roryc.ca\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.roryc.ca\/blog\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.roryc.ca\/blog\/wp-json\/wp\/v2\/comments?post=15232"}],"version-history":[{"count":1,"href":"https:\/\/www.roryc.ca\/blog\/wp-json\/wp\/v2\/posts\/15232\/revisions"}],"predecessor-version":[{"id":15233,"href":"https:\/\/www.roryc.ca\/blog\/wp-json\/wp\/v2\/posts\/15232\/revisions\/15233"}],"wp:attachment":[{"href":"https:\/\/www.roryc.ca\/blog\/wp-json\/wp\/v2\/media?parent=15232"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.roryc.ca\/blog\/wp-json\/wp\/v2\/categories?post=15232"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.roryc.ca\/blog\/wp-json\/wp\/v2\/tags?post=15232"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}