How Equity is Determined for your Home Equity Credit Loan

Our economy is in turmoil. Gasoline prices are fluctuating nearly every day and as a result everything else that we normally purchase has increased in price as well. With our economy in such a volatile state it is no wonder that many homeowners have found the need to use the equity built up in their home through a home equity credit loan.

If you find yourself in this situation it is very important that you understand how a home equity credit loan works. Before you head off to a lender to get your loan it is vital that you understand the word equity.

Equity

In its most basic form equity is the difference between the fair market or appraised value of your home and how much you owe on it.

For example, let’s say that you purchased your home 10 years ago. The original amount was $250,000 with $25,000 down payment. You have never been late with a payment and have paid down $75,000 of the debt. You are considering a home equity credit loan and need to know the equity value of your home. See below

Current Mortgage Amount
Cost of Home  $250,000
Down Payment - $25,000
Mortgage Amount = $225,000
Principal Paid - $75,000
Current Mortgage Amount = $150,000
  
Equity in the Home
Assessed Value  $500,000
Current Mortgage Amount - $150,000
Equity  = $350,000

There are other factors that my affect the final equity value such as second mortgages or other liens against the property but this is just an example to acquaint you with how equity is determined.

One of the ways to access this built up equity is through a home equity credit loan. This type of solution is a second mortgage that allows you to turn the equity in your home into a credit line for home improvements, college education, medical expenses, debt consolidation, or other expenses.