Understanding Home Equity Products

The most common reason that many people give for refinancing their home is as a means of drawing out the equity in their home in the process. A home equity loan or line of credit is a great way to use your home's own value to increase its value further by paying for renovations, adding on extra rooms or through landscaping. People also use the equity in their home after a refinance in order to pay off other debts, buy new cars, or even take cruises around the world to celebrate retirement. If you choose to refinance your home now in order to access the equity in it you may find that you have a world of new financial options available to you.

Home Equity Loans

The Home equity loan is a loan that is offered usually as a percentage of the available equity in your home. If, for example, you owed $150,000 left on your home loan and the home was valued at $325,000, you would have $175,000 worth of equity in your home. After refinancing in order to access that equity, you could get a lender to give you a percentage of that equity as a new, cash loan to use as you wish. Lenders usually offer home owners around 75%-80% of a home's current equity as a loan, so in the previous example you would be offered between $131,250 and $140,000. Home equity loans are usually offered at a fixed interest rate, which means you don't have to worry about the payment for your loan fluctuating over time, possibly making it more difficult to make your payments.

Home Equity Lines of Credit

The Home Equity Line of Credit, or HELOC is similar to a home equity loan in how it is calculated and how much will be made available to you based on the equity value of your home. The major difference between this and a home equity loan, however, is that the home equity line of credit is not a flat, fixed loan amount that you are given and simply must be repaid. A home equity line of credit acts as a credit card that whatever you charge is charged against the available equity in your home. Restrictions on the use of a home equity line of credit can be significant, determining the minimum that you can charge at once (possibly $300, or more), minimum usage levels, such as you have to use your line of credit at least once every six months, as well as the possibility of penalties being imposed if you are late or miss a payment to the lender. Your home equity line of credit will be available to you, as long as you follow the terms and conditions, for a set period of time after which it may expire and no longer be available to you, or you may have the option of renewing it.