When you own your home, the difference between what you owe the bank and what your home is worth, is your equity. Your equity is the amount of value you own in your home. Occasionally, you may need money to remodel, to make repairs or for other expenses. Your bank may agree to lend you the money by establishing a home equity line of credit (HELOC). Unlike a second mortgage, a HELOC is a revolving account, and you may borrow money and pay it back on a flexible plan.
Step 1
Call your bank to find out what the payoff is on your mortgage. This is the amount of money you currently owe the bank for your house, but it does not include interest.
Step 2
Find out your home's current market value. A local real estate broker can prepare a market analysis, comparing your home to homes of the same style, size and age that recently sold. If you are applying for a large HELOC, your bank may send a licensed appraiser to your home to determine its value.
Step 3
Subtract your mortgage payoff from your home's value. For example, if the market analysis shows your home is worth $200,000 on today's market and you owe the bank $75,000, your home equity is $125,000.
Step 4
Contact your banker to determine how much of your home equity qualifies for a HELOC. Most banks will not establish a line of credit that is more than 75 percent or 80 percent of your equity. Assuming that your home equity is $125,000, you may qualify for a HELOC of up to $100,000.
Step 5
Agree to allow the bank to secure the line of credit with your house. Like a mortgage, a HELOC uses your house as collateral. If you fail to pay back the money, the bank may take action to seize your home.
Step 6
Borrow and pay back money from your home equity line of credit as you need it. Interest accrues only on the money you use. If your HELOC has a $100,000 limit, you will only pay interest on the amount you borrow. If you withdraw $20,000, interest will accrue on that amount, but not on the remaining $80,000. If you pay back $5,000, interest will only accrue on the $15,000 you still owe.
Step 7
Pay a minimum amount to the bank every month, if required. The terms of a home equity loan may vary from bank to bank, but you may have to make monthly payments on your account. This payment is in addition to your mortgage payment and it may be a fixed amount or a sliding amount, based upon the amount of money you withdraw from your HELOC. This payment may be only for interest or for interest and a portion of the principal, combined.
Tips and Warnings
- Roll your HELOC into a second mortgage for a lower rate. If you use the money to finance home repairs or remodeling, you can apply for a second mortgage with a lower interest rate. Home equity line of credit interest rates are generally a bit higher than a mortgage interest rate so you may also refinance your home to lower your monthly payments.
- Avoid using money borrowed from a HELOC for consumer purchases that quickly depreciate, since your home is collateral for the purchases. MSN Money suggests that a home improvement project might be a good choice for borrowing from a HELOC.
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