Home Equity Calculator

Home equity is the market value of your home minus the total amount still owed on that property

. For instance, let's say Mr. A owns a home with a market value of $500,000. He has a mortgage on this home and currently still owes $125,000 on that mortgage. To find out Mr. A's home equity, simply subtract the amount owed from the market value, which makes it $375,000. If Mr. A has a second mortgage on his home, the balance outstanding from this mortgage should also be subtracted from the home's value. In short, your equity on the home increases as your mortgage balance decreases.

Generally speaking, you may borrow up to 75% to 80% of your home equity, although some lenders would potentially allow a 100% borrowing. Many people use this type of loan to finance their major expenses such as college education fund or medical bills. However, you may want to bear in mind that a home equity loan is the same as any secured mortgages, in the sense that, a failure of mortgage payment may result in foreclosure of your home. So it is advisable to understand your own financial situation before taking up a loan as you are putting your home in the line when you do so.

Calculating your equity is usually not a complicated process. However, if you do face problems in doing so, you may approach a lender or mortgage provider for help. Alternatively, you may also make use of the home equity calculators that are widely available on the Internet nowadays. These online calculators are easy to use; you may only need to have the figures as required, like your estimated home value and current mortgage amount, key them in, and you would have the results in a matter of seconds! There are also many types of online calculators available, from mortgage calculators to payment calculators. Needless to say, these online help are available as self-help only. You may want to double check and confirm with a professional before making any decisions.

There are two types of loans available which use the home equity as a collateral - the home equity loan (HEL) and the home equity line of credit (HELOC). Both loans are equivalent to second mortgages, although they can be a first mortgage as well, or a typical residential mortgage. They are usually available for a shorter period of time as compared to first mortgages. The amount of loan that you can borrow would be dependent on the amount of equity on your home.

A home equity loan (HEL), otherwise known as closed-end second mortgage, is very similar to your first mortgage. One lump sum of loan is borrowed and paid off over a fixed amount of period with a fixed interest rate. You may not borrow further from the loan once you have closed the deal. The benefit of this type of loan is the regular payment schedule and the fixed interest rate.

On the other hand, the home equity line of credit (HELOC), otherwise known as open-end mortgage, behaves in a similar manner to that of a credit card. Instead of a lump sum loan given upfront, the borrower would use a line of credit to borrow money. This means that the borrower may choose however much to borrow and whenever he wants to, as long as the loan is within the equity amount and done within the 'draw period', which is dependent on the terms of loan. Another major difference would be that the interest rate for HELOC would be variable and may fluctuate over time, but the good news would be that these interests are, more often than not, tax deductible.

by: Ask Bill

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