Looking for a creative way to consolidate high-interest debt, cover emergency expenses, or fund a home improvement project? The home equity you’ve built may hold the solution you’re looking for.

Home equity is the difference between your home's market value and what you owe on your mortgage. And if you have paid down your mortgage and your property value has increased, you may be sitting on a valuable financial resource.

Ready to unlock your home's hidden potential? Here's your insider's guide to home equity loans.

Understanding Home Equity

Although most home buyers say they “own” their home, the truth is they have entered into a lender agreement in which they build ownership over time. Home equity represents the portion of your home that you actually own, either because you have paid down your mortgage principal or your property value has increased.

How Is Equity Calculated?

At face value, the equity calculation formula may seem relatively straightforward: Simply take your home’s current market value and subtract the outstanding mortgage balance.

However, things get a bit murky when determining market value. This is why you will need to work with an experienced home equity lending team. Typically, we use two valuation methods to ensure accuracy:

• Professional Appraisal: When a licensed appraiser inspects your property, taking into account its condition, including upgrades and unique features. The appraiser will then compare your home to “comps”—recently sold properties that share similar features to your home.
• Comparative Market Analysis (CMA): Although a CMA will include pulling comps, this comprehensive process determines market value by considering market trends, neighborhood conditions, price-per-square-foot comparisons, and additional factors.

What’s the Difference Between a HELOC & a Home Equity Loan?

To better understand how a home equity loan works, let's look at your two primary options:

A Home Equity Line of Credit

A HELOC is a second mortgage that allows you to borrow against your home's equity. The caveat is that lenders generally impose a lending threshold, allowing you to borrow only up to 85% of your equity.

Similar to a credit card, a HELOC gives you flexible access to funds during a "draw period" (typically 10 years). Although home equity line of credit rates may change, you will only pay interest on the portion of the loan that you actually use.

A Home Equity Loan

Unlike a HELOC, a home equity loan provides a lump sum with fixed interest rates and monthly payments. In other words, home equity lenders give you the entire loan amount upfront, which you repay over a set term. The predictability of a locked-in interest rate and repayment schedule makes this appealing to many homeowners.

Benefits of Home Equity Loans

While you can use a home equity loan for any purchase, we strongly advise against using funds for purchases that cannot be recouped. Instead, we recommend using home equity loans to:

• Finance home improvements like a kitchen or bathroom remodel, new windows, or a roof replacement. Why? These projects add value to your home.
• Consolidate high-interest debts by combining them into a single, lower-interest home equity loan. Doing so will reduce your monthly payments and may save you thousands of unnecessary interest charges.
• Pay for emergency expenses like medical bills, vehicle repairs, or unexpected home repairs.
• Pay for college, as home equity loans may be lower than private student loans. Plus, they may offer additional tax advantages.
• Finance investments like starting a business or purchasing a rental property.

Determining Home Equity Line Credit Rates

When evaluating different home equity lenders, it's important to understand how they determine rates. While criteria vary between lenders, most consider:

1. Your credit score: The general rule of thumb is the higher your credit score, the lower your interest rate will be.
2. The combined loan-to-value ratio: The total amount you borrow divided by the property’s value. Lower ratios generally yield lower home equity line credit rates.
3. Debt-to-income (DTI) ratio: How much money you make versus how much debt you must pay off every month. Lower DTI ratios typically mean lower interest rates.
4. Repayment history: Borrowers with a history of timely repayment will likely receive lower interest rates.

How to Get a Home Equity Loan

If you’re wondering how to get a home equity loan, the first step is finding a reputable lender, preferably a non-commission-based one like JustChoice Lending. Our team is here to help you find the best loan program and rates available—not pressure you into a program that doesn’t consider your best interests.

Once we discuss our program offerings with you, we will typically request that you gather documents like pay stubs, tax returns, bank statements, and mortgage statements. Rest assured, we will guide you through every step of the process.

Your Equity, Your Way: Smart Borrowing Made Simple

Whether you are looking for creative ways to fund a home improvement project, consolidate high-interest debt, or grow your investment portfolio, we can help. As a local-first, non-commission-based lender, the JustChoice Lending team is here to help you find a home equity loan that works for you. Contact us today!