You’ve probably heard neighbors, friends, or family members mention their second mortgage or talk about the home equity line of credit they just secured. If you’ve simply nodded your head in confusion, you could be missing out on an opportunity to leverage your home’s value to pay for a big-ticket project or address an emergency financial situation. Let’s review the basics.
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What is home equity?
Home equity is the difference between the appraised value of your home and the amount you still owe on your mortgage. That difference in value can be borrowed in the form of home equity loans or home equity lines of credit. The home equity loan and line of credit have unique advantages, fees, qualifications, and intended purposes. Every financial institution is different, but typically a lender will not allow a borrower to exceed 80 to 85 percent of his or her home’s value, and it is important to know that in both cases your home is the collateral for the borrowed funds. Some financial institutions may allow you to borrow more, even up to 100 percent, so shop around and explore your options.