Home values are dependent on the market in which you live. The year 2008 gave us a stark reminder than home values do not always go up and we need to use caution when accessing the equity we have built in our homes.
Homes build equity in one of two ways. First is the mortgage is paid down. Each month, your mortgage payment is divided into an interest portion and an equity portion. The equity portion pays down the loan balance building equity in your home. Each month the amount paid towards the loan balance increases because the interest payment decreases as the balance declines.
Equity also increases through appreciation. Home values typically increase over time. Home improvements and upgrades can also add to your home’s value giving you more equity. The home’s value can be established through an appraisal or electronic evaluations, depending on the lender.
Loan to value (LTV) ratios will vary between lenders and could be as high as 95% for your primary residence. HELOC loans are generally not government backed (like many mortgages) and are held by the lender. This means approval requirements will vary widely across lenders. It might be possible to have marginal credit and still get approved if you have enough equity.
Not all HELOC loans are the same. They will have different draw periods, interest calculations and terms. It is common to have a 10 year draw with very low monthly payments. Then the loan amount will amortize for the next 10 years in order to pay off the line of credit.
Speaking with a specialist at Finance Solutions will help you evaluate this option to see if it is right for you.