A home equity loan is a second mortgage that enables you to borrow against the equity in your home. The loan amount is based on your property’s value, typically determined by a licensed appraiser. Homeowners can access this equity through either a home equity loan or a home equity line of credit (HELOC).
A HELOC offers a fixed interest rate, which remains consistent throughout the loan term. Borrowers receive the loan amount in a lump sum and repay it in fixed monthly installments.
What is Home Equity (HELOC)?
Home equity is the difference between your home’s market value and your remaining mortgage balance. You can increase your equity by paying down your mortgage or by the appreciation in your home’s value over time.
How to Calculate Home Equity
To calculate your home equity, follow these steps:
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Determine Your Home’s Market Value: Use online estimators or consult a local real estate agent or licensed appraiser for an accurate home value.
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Subtract Your Mortgage Balance: Subtract your outstanding mortgage balance and any other secured debts from the home’s market value.
For example, let’s say your home is worth $450,000, and you owe $150,000 on your mortgage. The calculation would be:
$450,000 – $150,000 = $300,000
So, your home equity in this case would be $300,000.
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How Does a Home Equity Loan Work (HELOC) ?
If you’re considering a home equity loan, the first step is to determine how much money you need. Unlike a HELOC, which lets you borrow funds as needed, a HELOC requires you to know the total amount upfront.
Next, calculate your home’s value and compare it with your remaining mortgage balance. With this information, start shopping around for a lender. Contacting multiple lenders will help you find the best interest rate and terms for your loan.
When you apply for a home equity loan, the lender will assess the equity in your home and determine your loan amount. Once approved, you’ll receive a lump sum and repay it over a fixed term with monthly payments that cover both principal and interest.
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Important Considerations
Remember, a HELOC is secured by your property, meaning your house is at risk if you fail to repay the loan. Defaulting on the loan could lead to foreclosure, which can severely damage your credit score and impact your ability to secure future loans.
Get a Home Equity Loan with Loan Pronto
Ready to unlock your home’s equity? Contact Loan Pronto to explore home equity and refinancing options tailored to your needs. Request a free rate quote or complete our online loan application to get pre-approved today!
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