What You Should Know About Using Your Home Equity

What You Should Know About Using Your Home Equity

As you pay down your home mortgage, you will likely gain equity in your home. This equity can help with your credit standing and provides an option for securing a new loan. However, before you choose to use your equity, there are a few details that you should understand. You can also get information regarding home loans and mortgages from Government websites.

What Is Home Equity?

The amount of equity that you have in a property is equal to the market value minus any outstanding mortgages. You gain more equity as you pay down your loan or if the value of your property increases.

For example, if your home is valued at $250,000 and you have $100,000 remaining on your mortgage, you have $150,000 in home equity. If the property gets reassessed at $275,000, you would have $175,000 in home equity. Lendi provide a calculator to help you find out the equity.

For millions of homeowners in Australia, this equity is their most valuable form of savings. It is also a familiar source for securing a loan.

What Is a Home Equity Loan?

A home equity loan provides a way to tap into your available equity. Typically, you will obtain a new loan that includes the existing value of your remaining mortgage and the equity that you want to access. These loans are often available with lower interest rates than the interest rates for credit cards or unsecured personal loans. This can be a good source of finance for older Australians also.

Why Do People Get Home Equity Loans?

These loans are used for a variety of purposes. However, the main reason why homeowners choose this lending option is that home equity is a simple source for quick cash. Leveraging your equity to obtain a loan may also be the only desirable option for those with bad credit.

While a home equity loan can be used for any reason, financial advisors often advise against taking out a loan for personal expenses. There are better uses for your home equity than paying for an expensive vacation or buying a luxury car.

One of the most common uses for a home equity loan is to cover the cost of home improvements. This is considered one of the smartest uses of equity as you are investing the money back into your most significant investment — your home. Moneysmart provide help if needed regarding borrowing.

People also often obtain equity loans to pay off existing debt. As mentioned, home equity loans usually carry a lower interest rate than credit cards and personal loans. If you are struggling to pay off these debts, an equity loan may provide a practical solution for consolidating your debt.

How Much Equity Can You Borrow Against?

While you may have $100,000 in equity, you cannot typically borrow against the total amount of equity that you have. Most lenders use a loan-to-value (LTV) ratio of 80% to 85%. This means that you can only borrow up to 80% to 85% of the value of your home.

For example, if your home is valued at $250,000 and the LTV ratio is 80%, you can only borrow up to $200,000. However, if you have an existing mortgage valued at $100,000, then the equity that you can access may be $100,000.

If you want to get an accurate estimate of how much equity you can access, you should use an online equity calculator. The calculator will use the property value and remaining mortgage to estimate how much equity you can access along with an estimate for your monthly repayments.

Categories: Finance

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