Home equity (also known as real property value) is the difference between the home's fair market value and the outstanding balance of all liens on the property. Equity increases as the payments are made against the mortgage balance and as the value of the property appreciates. For example: Home Value = $300,000. Mortgage Balance = $150,000. Equity = Home Value - Mortgage Balance = $150,000 Your home equity can be a source of cash to
- Reduce your interest rate
- Decrease interest costs
- Consolidate existing debt
- Increase your cash flow
- Start and/or build your investment and wealth management strategy
- Access equity for home improvements and renovations
Home equity may also serve as collateral for a home equity loan or home equity line of credit (HELOC). A HELOC differs from a conventional home equity loan in that you are not advanced the entire sum up front, but uses a line of credit to borrow sums that total no more than the credit limit (similar to a credit card). Another important difference is that the interest rate on a HELOC is typically variable. Some lenders require that you maintain a certain level of equity in the home to qualify, as failure to repay the loan or meet loan requirements may result in foreclosure.