You bought your house for one price and now it’s worth more. The difference in what you paid for your house and what it’s worth today is the equity you have built up in your home.
You can borrow the equity you have in your home by working with a bank or mortgage company. Typically, you have a first mortgage already on your home so when you borrow equity you do so with a second mortgage or a home equity loan or line of credit.
When you’re ready, these are the seven steps you have to take.
1. Purpose the Funds
Before you run to the bank or lender, the first thing you want to do is determine the reason you want to access the equity in the first place. Some homeowners have an immediate need for these funds, while others simply want to have something in place in case they need to access the equity in an emergency.
2. Choose the Right Type of Loan
Once you know what you need the money for you can easily choose the right type of equity loan or line of credit to access these funds. If you have an immediate need for the money, then it is typically best to use a home equity loan.
A home equity loan:
- Has a fixed interest rate
- Provides you with a lump sum amount upfront
- Requires you to start making payments on the funds right away
- Tends to have a lower interest rate than a home equity line of credit
If you’re in a situation where you need to access the money a little at a time or just need to set up something in case of an emergency, then a home equity line of credit (also known as a HELOC) might be right up your alley.
A home equity line of credit:
- Allows you to access funds as you need them instead of as a lump sum (similar to how you would use a credit card)
- Requires you to make payments on the amount you have used rather than a lump sum amount
- Has a variable interest rate
- Is a revolving line of credit so as you use it and pay it back is available for you to use again
3. Estimate the Equity You Have
The lender requires an appraisal to determine the current market value of your home, but you can estimate the market value for now by looking at sale prices for homes in your neighborhood that are similar to your own home.
Websites, such as Zillow.com, provide an estimate of your home value.
If you have a first mortgage (or any other mortgages on your home), you have to deduct the balance of the existing liens to determine how much equity you have built up in your home.
For example, if your home is worth $100,000 and you have a mortgage balance of $50,000, then you have $50,000 in equity ($100,000 – $50,000 = $50,000). A bank or lender, however, is not likely to lend you 100% of your equity, so expect to be able to borrow 80-85% of the equity.
If your home is worth $100,000 and you owe $50,000, you can likely expect to access approximately $30,000 in equity ($100,000 x 80% – $50,000 = $30,000). If a lender is willing to lend 85% of the market value minus existing liens, you can expect to access $35,000 in equity ($100,000 x 85% – $50,000 = $35,000) in this situation.
4. Shop for Lenders
All lenders are not created equal. This applies when you’re looking to borrow against the equity in your home as well. Shop around and compare equity loans or lines of credit for at least three lenders, banks, or mortgage companies before you make your final decision.
Be sure that you have the interest rate, payment terms, annual percentage rate (APR), and any costs involved in establishing a home equity loan or line of credit. The only true way to compare equity loans or lines of credit from different lenders is to compare the APR.
The lender offering you the lowest APR is offering you the best deal (as long as you are comparing the same loan at each lender). For example, you can compare a home equity loan at Lender A with a home equity loan at Lender B and Lender C.
You can also compare a home equity line of credit from Lender A with one at Lender B and Lender C.
You cannot compare a home equity loan with a home equity line of credit at different lenders as this is not a proper comparison because it is two different ways for you to borrow the equity in your home.
5. Apply
Now you’re ready to apply. Applying for an equity loan or line of credit is similar to applying for a mortgage like you did when you bought your home. Most lenders are going to require an appraisal on the home and require you to complete an application, supply documents such as employment verification and tax returns.
A lender is also going to pull your credit report. So all of these factors are considered in approving (or denying) you for an equity loan or line of credit.
6. Receive/Access the Funds
Once you’re approved, you’re ready to receive and spend the funds. How you do this depends on whether you have a home equity loan or a home equity line of credit. If it’s a loan, you receive all of the equity as a lump sum amount. It can go into a bank account and there it sits as you need to access it.
If you’ve established a home equity line of credit, the lender typically gives you a card or checks to access the funds as you need them. When you need to use the money, you can use the card (works like a debit or credit card) or write a check (depends on what your lender offers).
7. Repay the Equity
Each month, you’ll receive a statement from the lender letting you know how much you owe. You have to repay the minimum amount due to the lender each month. Repayment of the equity loan or line of credit begins as soon as you take the loan or as soon as you access the line of credit.
When you need or want to borrow the equity you have built up in your home, take these seven steps to make it happen.
