Home Equity Loans & Lines of Credit

The equity in your home is the difference between how much you owe on your home loan and the value of your home. In most places the value of homes generally goes up. This is called appreciation. As the value of your home rises (appreciates), the equity you have in your home also rises.

Let’s assume that you bought your house five years ago and that you paid $150,000 for it, and that you had a down payment of $20,000. That means that 5 years ago you borrowed $130,000 to buy your $150,000 home. Today, after five years of appreciation, your home is now worth $200,000.

Since you owe $130,000 on your home, and your home is worth $200,000, you have $70,000 of equity in your home. (Actually you would have a little more equity since you have been paying down your mortgage for 5 years and you now owe less than $130,000, but let’s keep this simple).

That $70,000 of equity is money that you can use. There are two ways for you to get your hands on that money. You can take out a fixed-rate home equity loan – sometimes called a 2nd loan – and make payments on your new loan plus make payments on your original first loan the same as always.

While the money from a home equity loan can be used for almost any purpose you wish, very often people use a home equity loan to pay off other debts that have a higher interest rate, or to make home improvements, or as a down payment on another piece of property. Whatever you use the proceeds of your home equity loan for, keep in mind that you now must make two payments each month, one for your original home loan and a second payment to pay for the home equity loan.

Rather than take out your entire home equity loan all at once, it is possible to get a home equity line of credit, which allows you to write checks which are secured by your home’s equity. This allows you to borrow only what you need at any one time and therefore only pay interest on the amount of money that you are actually using, and not on the entire amount that you have been approved for.

Many people find that a home equity line of credit carries a lower interest rate than their credit cards, plus in most cases the interest paid on a home equity line of credit is tax deductible whereas the interest paid on credit cards is not.

To determine which is the best equity loan for your particular needs and situation,
it is recommended that you speak with both your tax advisor and your loan representative via Washington Mutual.