Home Equity 101

By Justin Hooker, Mortgage Loan Officer

What is home equity and how can it help you? Equity is the difference between how much your home is worth and all debts against it, or simply the portion of your home that you actually own. A home equity loan or home equity line of credit, often referred to as a “second mortgage,” allows you to borrow money against your single biggest asset. This can come in handy if you’re looking to pay off high interest debt, want to do some home improvements, need a down payment for another home, or simply want access to funds in case of emergency. Before you tap into this equity you need to understand what you’re getting into.

Home Equity Loan (HEL) vs. Home Equity Line of Credit (HELOC)

Once you’ve established enough equity you can then look to borrow against it in the form of a home equity loan or home equity line of credit. We’ll explain what both are, what makes them different, and what they’re commonly used for.

Home Equity Loan: A Home Equity Loan allows you to borrow a lump sum amount over a set amount of time. The terms of your loan are locked in from the start and you’re expected to pay it back in fixed monthly payments, usually over 10 or 15 years. This option is ideal if you have a large, immediate expense or would like to consolidate high interest debt into one low monthly payment.

Home Equity Line of Credit (HELOC): A HELOC functions similarly to a credit card, while using your home as collateral. Your lender will determine a maximum loan amount and from there you can borrow whenever you want, for whatever you want, up to your credit limit. This gives you the flexibility to borrow as you need it while only paying interest on what you use. Another difference between a HELOC and a HEL is that lines of credit typically come with a variable rate of interest and at times have an interest only payment option. A HELOC would be commonly used for things such as home improvement projects where expenses are incurred in stages or college tuition where expenses are paid over time.

In conclusion, home equity can be a great way to borrower funds, or an excellent tool to improve your financial picture. Now that you know the basics, we can help you get things started. Please reach out to Michigan First Mortgage if you have any questions and our team will help you find the best financial solution for your needs!