What is Home Equity?

You’ve probably heard friends or family talk about having equity in their home. You’ve seen television advertisements or offers for home equity loans and lines of credit. But, what exactly is home equity?

Put simply, home equity is the amount of your home that you actually “own.” It is the fair market value of your home minus any loans you have on the property. While technically you own a home the moment you sign the final paperwork on your purchase, your lender is using your home as collateral for your mortgage loan.

That means the bank has a lien on the property. The financing bank or credit union doesn’t own the home while they hold a lien (unless the home is foreclosed on), but you won’t have full equity in the home until you pay off the loan entirely. You may also have liens on your property from other sources, such as the company that financed a roof repair, a previous home equity loan lender or a second mortgage lender.

How to Use Your Home Equity

Once you’ve accrued some equity in your home, you may decide that you want to tap into that home equity to upgrade your kitchen, put in a pool, or even pay down debt or take a much-needed family vacation. To use your home equity in these ways, you could take out a home equity loan or get a HELOC (pronounced HEE-lock), which is a home equity line of credit.

If you get a HELOC with Desert Financial and you’re at the Rewards or Rewards+ level of our Relationship Rewards program, you could qualify for a loan discount on your HELOC. You’ll also earn the Relationship Rewards Borrowing point if you don’t already have it. That could potentially increase your level!

How Much Can I Borrow?

Your lender will determine how much of your home equity you can borrow against. Some lenders will qualify buyers with excellent credit, payment history and reasonable debt-to-income ratios for a home equity loan or line of credit that’s up to 80% of the value of your home minus the amount you still owe on your mortgage. Why doesn’t every lender offer that high of a loan amount? Approving the buyer for a lower percentage of their home equity minimizes the risk to both the lender and the borrower.

HELOC vs. Home Equity Loan: The Differences

Both a home equity loan and a HELOC are money that a homeowner borrows against the equity in their home. The main difference between the two options is that the borrower receives the cash from a home equity loan all at once, while a HELOC allows you to take out money as you need it.

After you find out if you have equity in your home, contact your credit union to see if you can tap into that equity with a line of credit. You don’t necessarily need to use your line of credit for renovations, either — you can use your funds to pay for furniture, to consolidate bills and more. The possibilities are almost endless!

The Next Step

We know you’ve got a lot to consider before tackling your home renovation project. To get you started, download The Handy Guide to Home Equity today and learn more about how a HELOC can help you with your remodel. You’ll also get helpful information and tips on popular renovations — including kitchens, bathrooms and outdoor living spaces!

Ready to put your equity to good use?


The material presented here is for educational purposes only, and is not intended to be used as financial, investment, or legal advice.