by Jacob Silverman
But, let's say you're not quite sure how much everything will cost. In that case, you might consider another type of home equity loan. It's set up more like a credit account, where you are approved a line of credit up to a certain amount. The lender might give you a credit card or a checkbook so that you can spend money against that line of credit.
About Equity
As we mentioned earlier, borrowers have several options when it comes to borrowing against the equity of their home -- a home equity loan (also commonly called a second mortgage), a home equity credit line (also called a HELOC) and a reverse mortgage. A home equity loan or second mortgage is based off of equity, or the amount of value you have in your house. Because homes generally appreciate in value over time, equity is calculated by taking the difference between the current worth of your home and how much you owe on your initial mortgage. Say you bought your house for $350,000 and you have paid off $175,000 of a $300,000 mortgage. A recent appraisal puts your home’s value at $500,000. You would calculate your current equity in your house like this:
$500,000 - $125,000 = $375,000
The $125,000 number is the amount of money yet to be paid on your mortgage. And because your house has appreciated in value -- somewhat like a stock or a valuable antique -- so has your equity in your home increased. In many cases, you may be able to use this investment to borrow against your equity in order to get another loan. And just like with your first mortgage, your house serves as the collateral that guarantees your loan to the bank. If you can’t pay off your second mortgage, you may be forced to sell your home, or the bank might seize it.
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