Borrowing Against the Equity in Your Home

Borrowing against the equity in your home could be an effective way to finance a child's education, cover unexpected medical bills or create a cushion for major emergencies. However, the Federal Trade Commission (FTC) warns against tapping the equity in your home to pay off credit card debt, take vacations or go on shopping sprees. The agency warns that you could lose your house to foreclosure if you take a second loan against the equity in your home and you are unable to make the monthly payments.

Instructions

1

Order an appraisal of your house or use some other method to determine its approximate market value. A real estate agent can put you in touch with a home appraiser. Or get this information for free by comparing your house to others that have sold recently in your neighborhood. The real estate website Zillow and others can offer free purchase price information on houses sold in your area. Once you apply for a loan the lender will order a more formal appraisal, but doing some homework on your own will help you determine if a home equity loan is even possible for you.

2

Check your mortgage billing statement or call your lender to find the current balance on your mortgage. Determine the equity in your home by subtracting the balance owed from the fair market value. Example: The fair market value of your home is roughly $175,000. You owe $100,000 on the home, leaving you with $75,000 in equity. Lenders may allow you to borrow up to 85 percent of your equity, according to the FTC.

3

Get unbiased advice about the pros and cons of borrowing against the equity in your home. Ask for a free consultation with a nonprofit credit counseling agency in your area, such as those affiliated with Consumer Credit Counseling Service. Get a referral for a counselor by calling a local charitable organization such as the United Way or Urban League. The counselor will explain the difference between a home equity loan, which allows you to borrow a lump sum against your equity, and a home equity line of credit (HELOC). The home equity loan requires regular monthly payments just like your mortgage. The HELOC is an approved line of credit that works like a credit card--you'll be required to make monthly payments only if you access the line and carry a balance.

4

Review your credit report and score. Simply having equity available in your home isn't enough to qualify for a loan or line or credit. Get a free copy of your credit report from the website Annual Credit Report. The site was established to offer free credit reports as required by the Fair Credit Reporting Act. Follow instructions included with the report to order your score separately for a fee. The credit score needed for approval can vary with the lender. According to the website Bank Rate, the cutoff for a "good" credit score is 620--but some lenders will approve real estate loans with lower scores. Whatever your score you should make sure all your current bills are up to date before applying. Also address any delinquent accounts that may have been sent to collect agencies.

5

Apply for a home equity loan or HELOC from your bank or credit union.