If you have less remaining mortgage balance than the value of your house – you’ve got equity. If you happen to find yourself in such a fortunate position, you are eligible of taking out a Home Equity Loan, otherwise known as a Home Equity Line of Credit (HELOC). A Home Equity Loan offers a lump sum at a fixed interest rate that’s repaid over a set period of time. On the other hand, a HELOC is a revolving line of credit that you can draw on, pay back, and draw on again for a set period of time, usually over a decade. It often starts with an adjustable-interest rate followed by a fixed-rate period.
Different lenders have different requirements for borrowing against home equities. Below are some typical guidelines that banks employs:
- Equity of your home is at least 15% to 20% of its total value (determined by appraisal)
- Loan amount cannot exceed 65% to 80% of home’s appraised value
Be aware that while you are paying back your home equity loan, you are also required to pay back your original home mortgage concurrently unless exceptions are applied. Speak to your mortgage specialist to confirm when you are required to make your first payments. To calculate the size of loan you qualify for:
Example of a Home Equity Loan
| Appraised value of your home | $250,000 |
| Maximum loan allowed | x 80% |
| Loan amount based on appraised value | = $200,000 |
| Less balance you owe on your mortgage | – $150,000 |
| Second mortgage credit limit | $50,000 |
Interest Rate and Fees
When taking out a home equity loan, it is important to ask the lender for a breakdown of associated fees and interest rate costs. Some of these costs are deducted upfront when the loan gets approved, while others are to be paid back over time. A few common fees and interests are listed below:
- Appraisal fees
- Title search
- Title insurance
- Legal fees
Borrow Limit
Generally, you can borrow up to 65%, and sometimes 80%, of the property’s value, minus its mortgaged debt. Again, this largely depends on the institution you’re with, and your unique situation. There is unlikely to be a minimum amount that you must take out, though if this is your case then there may be other alternatives that could work much better for you. Speak with your mortgage broker to decide what is best for you.