The equity in your home is a powerful financial tool. It can be used for home improvements, consolidating debt, and other projects or payments.
How to Calculate Your Home Equity
Equity essentially represents the difference between your home’s value and the amount you owe on it. To calculate your equity, determine your property’s value and subtract any loans against it.
Equity is often expressed as LTV, or “loan-to-value,” which is a ratio of debt to value. For example, if you’ve borrowed $300,000 on a house worth $400,000, dividing $300,000 by $400,000 gives an LTV of 0.75 or 75%.
What is a home equity loan?
Home equity loans are typically fixed-term loans where you receive the full amount upfront. They can be either fixed-rate, with a consistent rate throughout the loan term, or variable-rate, where the rate can change over time. These loans are often used for one-time projects, such as a bathroom remodel, or for situations where you need all the money at once, like consolidating debt.
What is a home equity line of credit (HELOC)?
HELOCs function similarly to credit cards. When approved, you receive a credit limit based on your available equity and can make advances up to that limit. You can withdraw the entire amount at once or in smaller increments as needed. As you make payments, the principal amount you repay becomes available to borrow again.
HELOCs typically have two phases: a draw period, during which you can make advances and pay a percentage of your outstanding balance each month (which can vary based on your balance), and a repayment period, where you make equal monthly payments to pay off the balance by the end of the term.
What Can You Do With Your Home Equity?
You can use funds from an equity loan for nearly any purpose, including:
- Making home improvements and repairs
- Paying for educational expenses
- Consolidating debt to lower your monthly payments
- Buying a second home or investment property
- Covering emergency expenses, such as car repairs
- Paying your taxes
Leave a Reply