How to Borrow Equity From Your Home for a Downpayment

Borrowing equity from your home can put cash in your pocket in the form of a loan. The equity serves as collateral for the loan, and you can use the money for any purpose--including making a down payment on another purchase, such as a second home or automobile. Challenges include having sufficient equity in your home for the money you need, and meeting income and credit requirements for the loan. Also, borrowing against the equity in your home is risky. Falling behind on the payments can cause foreclosure.

Instructions

1

Determine how much you need for a down payment on the purchase you're planning. For example, lenders usually require a 20 percent down payment on a home purchase, but it's possible to purchase some homes with lower down payments. However, lenders may require larger down payments for second homes.

2

Order an appraisal of your home by a licensed home appraiser. An appraisal determines the fair market value for your home. Or ask a real estate agent to estimate the value by comparing it to similar homes recently sold in your neighborhood. Find a licensed home appraiser by asking for referrals from friends or neighbors who've sold homes, or ask a real estate broker or agent.

3

Subtract your home's fair market value from the balance remaining on the mortgage loan and any other loans on the property, if you're still paying on the home. For example, if the value of your home is $200,000 and you owe $50,000, then the difference of $150,000 represents your equity.

4

Apply for a loan to borrow equity from your home. Apply only if the equity in your home is sufficient to cover the down payment you're seeking. Lenders will usually let you borrow up to 80 percent of your available equity. Apply for the home equity loan at a bank or credit union, or from your current mortgage company. To apply you'll need much of the same information that you presented when applying for your mortgage, including tax returns, pay stubs and W-2 forms. Also be ready to present a complete list of bills and expenses to determine if you qualify based on income.