A home equity mortgage is really a line of credit secured by the equity value in your home. It’s usually available at a low interest rate and you only borrow what you need and when you need it. In other words, with a home equity mortgage you don’t have to take out the entire amount of loan all at once. This is called revolving credit. Also known as borrow as you go!
And because a home equity mortgage is secured by your home, the interest you pay may be tax-deductable. By using the equity on your home, you can qualify for large amounts of credit at relatively low interest rates. Your home is your collateral. Since the equity on your home may be your largest asset, a home equity mortgage is usually used for large expenses. Examples of how lots of people use home equity mortgages would be:
- college tuition
- major home renovations
- medical bills
A home equity mortgage is not really for day to day expenses like utility bills, rent, or groceries. The interest rate is pretty low, but it can vary month to month, according to the outstanding balance. And of course you should never put your home at risk unless you really need the line of credit. As with any type of home mortgage, the home is not completely yours until your mortgages are paid off. And a home equity mortgage is no exception. That’s why it’s used for major life expenses like college tuition, medical bills and other extremely important situations.
How does a Home Equity Mortgage Work?
The lender for your home equity mortgage will calculate how much you can borrow by this simple formula. Your credit limit will be based on the value of your home and the balance owed on your mortgage. They will usually take 75% of the appraised value minus the balance owed, and that’s your credit limit. If the value of your home goes down, the home equity mortgage becomes a risky thing for you and for the lender. Your home mortgage rate can vary, and this will affect your equity in the long run.
After this mathematical formula, the lender will also consider your personal financial situation. Your ability to repay the home equity mortgage is a very large factor. They look at how much debt you already have, your income, and any other financial obligations you have that may make it harder to pay back your home equity mortgage. And of course your credit history is a big part of what your credit limit on your home equity mortgage is going to be.
After your credit limit is set, you will also get a set term in which you have to borrow money. Often a home equity mortgage term is set at ten years. This is called your draw period. Sometimes the home equity lender will let you renew the line of credit after your draw period is up.
Once your equity loan is set up, you will be able to take money out either with special checks they give you, or a credit card that’s set up for this line of credit. Sometimes the lender will require that you withdraw a minimum amount each time, and others won’t require that. Sometimes they’ll require that you with draw an initial advance once you get the home equity mortgage set up.
How your home equity mortgage gets set up will vary from lender to lender, but make sure you research the matter completely so you get the best situation for you.
