26 Aug 2020, Author:

When homeowners get into financial trouble, they generally look at their house to solve their problems. Even the people that have other assets find this road quite appealing because of home equity.

But what do you really know about home equity? If your answer is “Not much,” then let’s start with the basics first.

 

What Is Home Equity?

Home equity is defined as the homeowner’s interest in their house. If your property value increases with time or you pay off the mortgages, then your home equity can increase. 

In simple terms, home equity is the part of your house that you actually own. Since you got a mortgage on the house or borrowed money to buy it, you only own the part of the house that has been paid off. Until you make all the payments to the lender, they will still have an interest in your home. But you will always be the homeowner.

As the owner, home equity is your most valuable asset. That is why you need to be very careful when using it. 

 

Calculating Your Home Equity

How Much Do You Have?

If you didn’t quite grasp the term, then here is a further simplification.

You can calculate home equity by subtracting your home’s actual value with the amount that you still owe to your lender, which would be for your primary mortgage.

For instance, your home is valued at £250,000, and your primary mortgage is £200,000. You have paid £50,000 to your lender, then your home equity would be £100,000.

 

How Much Is Your Equity Percentage?

You can check yours by dividing the equity value by your home’s market value and multiply by a hundred. 

For instance, if you had a down payment of £50,000 and you paid £50,000, then you add these two values to get your home equity (£100,000). If your home’s market value is £250,000, then you divide £100,000 by £250,000. The answer you will get with this example is 0.4, and you can multiply that by 100 to get your equity percentage. That would be 40% in this case

 

Best Ways to Get Home Equity

While there might be other methods, there are only two best ways to get home equity. But before getting on with it, you must know that you can lose your home if you can’t pay off either one of these two ways mentioned below. 

 

Home Equity Loan

A home equity loan is also known as a second mortgage. It is a convenient way to borrow money against your home equity with a fixed interest rate. 

 

How Does It Work?

In this loan, your home acts as the security to the money you are borrowing from a lender. However, when you go to a lender to get home equity, you will most likely see that no one is ready to offer you the full amount. 

Instead, they will check your credit and income, as well as the equity, and offer a maximum of 80% to 90%. Also, your credit score plays a crucial role in deciding the interest rate on your loan. 

These loans work in a similar way to conventional mortgages. You make fixed, regular payments that cover the principal amount as well as the interest. Since the rate is fixed, you might end paying much more than your home’s value if it goes down in the future. But you will owe less if your home’s value actually increases. 

 

How to Qualify For a Home Equity Loan?

If you are interested in getting home equity loan, then you need to meet all of these requirements:

  • Your credit score needs to be at least 650, but some lenders require a little higher. 

 

  • You need to have at least 20% equity in your property. Calculate with the method mentioned above.

 

  • You also need documents to show proof of income.