If you’ve been in your home for a few years or have seen home values rise in your neighborhood, there’s a good chance you have equity. You may be able to access that equity to make improvements to your home, consolidate bills, or finance another large expense. Here, we’ll help you estimate how much equity you may have — and determine how much you may be able to borrow.
Defining home equity
Equity is what’s left when you subtract your mortgage balance from your home’s value. It’s essentially the portion of your home that you own. For example, if your home is valued at $300,000 and you still owe $200,000 on your mortgage, then you have approximately $100,000 of equity.
Determining home value
Home value isn’t necessarily the same as what you paid for your home. Instead, it’s more about what your home is worth today. You can estimate this by checking the price of similar for-sale homes in your area.
For a more accurate value, you can hire a home appraiser. (In fact, you’ll likely need a professional appraisal if you apply for home equity financing.) An appraiser will consider aspects such as area home sales and market trends, as well as the condition and features of your home.
Calculating what you can borrow
The amount you can borrow isn’t usually the same as the amount of equity you have in your home. That’s because lenders typically allow you to borrow only a certain percentage of your home’s equity, based on a loan-to-value ratio, or LTV. This figure compares the amount you want to borrow against your home’s value.
Home’s appraised value: $300,000
Mortgage balance: $100,000
Maximum possible loan amount based on LTV:
$300,000 x 80% = $240,000
Maximum amount you may be able to borrow based on LTV and your equity:
$240,000 - $100,000 = $140,000
Bear in mind that the amount you are ultimately approved to borrow will depend on multiple factors, including your credit history.
Choosing how to borrow
You can choose to borrow against your equity using one of two methods:
- A home equity line of credit, or HELOC, which works much like a credit card. You can borrow as much or as little of your line amount as you want, when you want. You pay interest only on what you use, and as you pay down your balance, that amount becomes available to use again. Interest rates on lines of credit are often variable. A HELOC account has a specific draw period (when the account can be drawn on and paid off) and a paydown period. During the paydown period, you cannot draw on the account. For example, a Westfield Bank HELOC account has a 10-year draw period and once that period ends, you will no longer be able to obtain credit advances and you must repay the outstanding balance on your account over a 20-year paydown period.
- A home equity loan, which gives you a lump sum upfront. You pay it back with regular monthly payments, much like a car loan. You pay interest on the entire amount, and that rate is usually fixed.
Remember that, in both cases, your home is being used as collateral, so you want to feel confident about your ability to repay what you borrow.
Understanding tax deductibility
Interest rates on a home equity loan or line of credit are often lower than what you might pay on a credit card or other forms of financing. Plus, the interest you pay may be tax-deductible — depending on details such as how you use your funds and the size of your mortgage. For complete details, talk with your tax advisor.
Now is the perfect time to tap into the value of your home with Westfield Bank’s limited-time, low introductory rate home equity line of credit offer. Apply today or speak with one of our bankers to learn more about using your home equity as a sensible financing tool.