Housing and Real Estate

Home equity can be defined as the monetary value that a homeowner currently has in his home. The amount of home equity that an individual possesses can be calculated by subtracting the outstanding balance of his mortgage, plus any liens or other debts held against the home, from the home’s total value.

This number is often expressed as a percentage. When a house is fully paid off, the owner is said to have 100 percent equity.

Types
1. Many homeowners with home equity will often borrow against the value of the home, using the equity as collateral. This is done using two forms of equity: equity loans and equity lines of credit.

In an equity loan, the homeowner is able to borrow a large sum of money at a fixed interest rate, such as would be done with a mortgage. Equity lines of credit make a certain amount of credit available to borrow if the homeowner needs it; he makes payments only if he borrows against the line of credit. The interest on these payments is generally pegged to prevailing market rates rather than fixed.

Function
2. According to GMAC Mortgage, equity loans and lines of credit serve different functions. Equity loans are generally used to pay off major expenses, such as home improvements, debts and, in some cases, the mortgage itself. This is because equity loans make a large sum of money quickly available to the homeowner. (more…)