Equity is the difference between what you owe on your home and what it’s worth. For example, if you buy a home for $100,000 and obtain an $80,000 mortgage, your equity is the difference, which is $20,000, or 20%. Equity in your home will change as the value and your outstanding mortgage balance change.
As equity grows over time, you can use it in different ways. For example:
If you want to sell it and buy another home. You can take the equity in your existing property and use that as a down payment on a new property. Investors often use this technique because they use less of their own money.
Tap into your home equity by taking a loan or a line of credit against it. For example, if your home’s value is $100,000, and your mortgage balance is $70,000, your equity will be $30,000. You can borrow, say, half of that from a bank to use for any purpose (such as renovations or to purchase a new home).
In this example, you can also take a second mortgage for up to $15,000. But if you already have a mortgage on your home, it may be more challenging to arrange than the first. And interest rates will be higher.
Second mortgages are riskier, so lenders charge higher interest rates. The reason: If you default on either the first or second mortgage and the property is sold, the first mortgage holder will be paid back first. The second lender takes second place.