How Do Home Equity Loans Work?

Austin and other Texas cities have been red-hot real estate markets, and many homeowners are reaping the benefits with higher home values. Austin home values have increased on average by 7.4% over the past year, according to Zillow, with nearly 4% appreciation predicted in 2020. Other Texas cities are seeing strong gains as well.

That increasing homeowners’ equity can be valuable when it comes to funding needs like college education, remodeling, or emergency expenses. How does a home equity loan work?

Leveraging Your Home’s Equity

Home equity loans let you use the equity you have built up in your home as security for another loan. Equity is simply the difference between what you owe on your home mortgage, and what the home is worth based on a market appraisal. For example, if you owe $200,000 on the mortgage, and the market value has appreciated to $350,000, your equity is $150,000.

Lenders will lend no more than 80% of your equity. In this example, you could potentially qualify for a home equity loan up to $120,000.

Home equity loans are secured by using your home as collateral. That means that, if you were to not make your monthly payments, the lender could foreclose on your home. Before making the loan, your lender will consider your income, debt, monthly expenses and credit history. Typically, these loan terms are for 10, 15, or 20 years.

Things to Consider

Because you will be using your home as security for the loan, carefully consider the loan’s purpose as well as changing market conditions. Instead of using a home equity loan for extravagant purchases or a pricey vacation, consider setting aside savings for those.

And remember that real estate markets are cyclical. If home values in your area should decline, a home equity loan could potentially put you in an upside-down situation, owing more on the home than it is worth.