- Trust & Wealth
- Real Estate
Emergencies happen. You might need to make an expensive home repair, pay for a medical bill, or help cover any other unexpected expense for you or a loved one. In a perfect world, we would all have enough savings to cover emergencies, but that’s often not the reality. If you’re a homeowner, though, you may be able to access the equity in your home to cover unexpected (or expected) expenses by using a home equity loan or line of credit.
Home equity is the value of your interest in your home. In other words, it is the home’s current value less any mortgages attached to the property. To determine your equity, find the value of your home and subtract the balance of your mortgage. For example, if your home is valued at $200,000, and your mortgage balance is $120,000, you have $80,000 of equity in your home. This value fluctuates over time as payments are made on your mortgage, or if your home’s value increases, your equity increases as well.
A home equity loan or line of credit allows you to borrow against the equity in your home. You typically can’t borrow against all of your equity, but you can borrow a percentage of it. In the example above, if your home is valued at $200,000, you may borrow up to 80% of that value less your current mortgage balance of $120,000 ($200,000 x 80% – $120,000). In this example, you may be able to borrow up to $40,000.
Home equity loans are lump sum loans that you repay over a set term, such as 10 or 15 years. Home equity loans are less popular than Home equity lines of credit, or HELOCs. A HELOC is a form of revolving credit, and it is also based on your equity. For example, if you qualify for a credit line of $40,000. If there’s an emergency and you need $10,000, you can withdraw $10,000 of your $40,000 credit line. You then pay back the loan with interest. If you need to borrow more, you can up to your credit line limit.
The most important thing to keep in mind with home equity products is that they use your home as collateral. In other words, if you do not repay the loan, your lender could foreclose on your home to repay the loan. With that in mind, it is critical to only borrow what you can comfortably afford to repay.
Qualifying for a home equity loan or HELOC is a relatively simple process, especially when compared to obtaining a mortgage in the first place. Lenders will check your credit, obtain a title search, and they may also require a home appraisal to determine the value of your home.
Your home is your most valuable asset. Tools such as a mortgage calculator can help guide your homebuying decisions, but it’s good to have expert advice from a lender you trust. At Arthur State Bank, we strive to be your trusted lender. We’ve been proudly serving South Carolina since 1933, and we offer modern banking with a personal touch. Complete our mortgage information request form to learn more about your home equity options.