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Home Equity FAQs

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The Basics (FAQs)

What is home equity?

Home equity is the portion of your home's value that you own, and is based on the current value of your home less than amount you owe. For many people, the equity in their homes is their most valuable asset. Home equity increases as you pay off your mortgage and as the market value of your home goes up.

How does a home equity loan work?

Home equity is the portion of your home's value that you own, and is based on the current value of your home less the amount that you owe. For many people, the equity in their homes is their most valuable asset. Home equity increases as you pay off your mortgage and as the market value of your home goes up. A home equity loan uses the equity you have built up over time to secure the loan. Home equity loans offer several advantages, including interest rates that are typically lower than those of other borrowing sources. Interest rates for home equity loans usually are fixed, and funds are generally disbursed in a single payout at the outset of the loan. A home equity line of credit (HELOC) works a little differently. With a HELOC, interest rates are usually variable, and you can draw against your credit line multiple times. There are also hybrid loans that combine the best features of home equity loans and HELOCs. The Figure HELOC, on the other hand, has a fixed interest rate and disburses the entire borrowed amount immediately. In this way, the Figure HELOC has some of the same features as a typical home equity loan.

How exactly do you calculate home equity?

To calculate how much equity you have in your home, subtract the amount that you still owe on your mortgage from your home's current market value.

Do banks calculate the equity in my home differently from each other?

Banks use the same formula, but the results might vary based on who does the appraisal of your home's current market value.

How much equity can I borrow from my home?

Lenders use a loan-to-value (LTV) ratio to calculate how much money they will lend with a home equity loan. A typical LTV is 80%. That means that your new home equity loan, when added to your current mortgage balance, can't be more than 80% of the value of your home. Some lenders use a higher LTV, which means that they can approve you for a larger home equity loan. LTVs generally fall into the 75%-95% range. Figure lends up to 95% LTV.

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Benefits and Drawbacks

What are the benefits of a home equity loan?

Because you use the equity in your home to secure a home equity loan, you can usually get significantly lower interest rates than you would with unsecured debt, such as credit cards or personal loans. Home equity loans may also be tax-deductible if you use the funds to make home improvements.

What are the drawbacks of a home equity loan?

If you start missing payments on a home equity loan, you put your home at risk. For that reason, when you apply for a home equity loan, be sure that you are comfortable with the size of the payments.

How can I use my home equity loan wisely?

It's best to spend the money from your home equity loan to purchase things that you need or to take steps that will improve your finances in the future. Home improvements, debt consolidation, college tuition, and unexpected medical bills or emergencies are all good uses of a home equity loan. It's usually not the best idea to use a home equity loan to pay for vacations or luxury goods.

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Strategies

What are some strategies to improve my home’s value?

Making necessary repairs and tackling home improvement projects are tried and true ways to increase the value of your home. Some home improvements that pay off particularly well are kitchen remodels, bathroom remodels, removing walls to create a more open floor plan, and projects that increase your home's curb appeal, such as new landscaping or siding. Some projects, such as installing new garage doors or enhancing your home's entry, will increase both the curb appeal and functionality of your home at the same time. Other improvements with a favorable return on your investment include installing a new deck or patio, replacing windows, and adding additional rooms. A home equity loan is an ideal way to finance home improvements because increasing your home's value is an investment in your future. In addition, there may be tax advantages to using a home equity loan for this purpose.

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Funding

How can I get funding in five days?

Banks can take up to six weeks to process and approve your home equity loan application and disburse your funds. There is, however, a much faster way. If you apply for Figure's home equity line, you can be approved in as little as 5 minutes and funding can occur in as few as five days five days2. Find out your interest rate in seconds with our easy online application.