My partner and I bought a home for $122k around a year ago from his family, it appraised at $190k during the inspection and loan process. It is an older home and we’d like to do renovations and eventually sell it.
We don’t have money for renovations currently, but know that Home Equity Loans exist but nothing else.
How does it work?
In: Economics
Let’s start with the concept of home equity. Your house has a market value, which is what somebody would pay for it today. This is usually an estimate based on the size of your home, general condition, age of the house, and what other similar homes nearby have sold for. Your equity in the home is the market value of the house, minus any loans you have taken out with the house as collateral (like a mortgage). So if your house is worth $190k and you took out a mortgage for $122k, you have $68k of equity in the house.
There are a couple of types of home loans. There is a first mortgage, which is typically used to buy a house in the first place. Sometimes this is called a purchase loan, because you are using it to purchase the house.
There are refinancing mortgages, where you are getting a completely new mortgage on the same house. Typically, you are doing it to either a) get better terms on your loan like a lower interest rate or longer repayment, or b) a “cash out” refinancing, where you are taking out a larger loan, repaying the old one, and using the leftover cash for…whatever. The important thing about a refinancing mortgage is that your old mortgage will go away completely, since you are using the new mortgage to pay it off.
A home equity loan is a mortgage that sits on top of your current first mortgage as a completely separate loan. It lets you use the remaining equity in your house to borrow more money, usually up to 80% of the home’s value combined. It then repays according to the terms of the loan.
Some people get home equity loans, which are for a fixed amount. Some people get home equity lines of credit, which gives you *access* to money that you can withdraw when you need it. Usually you are able to take money out on the line of credit for up to 10 years while repaying only interest, and then the balance turns into a 20 year loan.
So if you have a $122k mortgage on a $190k valued house, you currently have mortgaged 68% of the value. That means you could take out another ~$23k of loans on top of your current mortgage and still get approved (assuming everything else qualifies).
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