What is home equity, and how is it different from cash? Equity is the estimated value of a property less debt secured by it. Accessing that value through a loan creates a repayment obligation. A credit limit is not the same thing as money you already own.
This is educational information, not a borrowing recommendation or financial, tax or legal advice.
What are equity and liquidity?
Equity is an ownership-value measure. It can change with property value and loan balances. Liquidity refers to access to usable funds. Selling expenses and other deductions can make sale proceeds different from a simple equity estimate.
What is a HELOC?
A home equity line of credit, or HELOC, is revolving borrowing secured by home equity. During its draw period, the borrower may draw funds under the agreement's terms. The repayment period follows the draw period and may have a different payment structure.
HELOCs commonly have variable rates. A lender may reduce or freeze further borrowing under circumstances allowed by the agreement and law. Missing payments can put the home at risk.
How do home-equity borrowing structures differ?
| Structure | What it is | What remains separate |
|---|---|---|
| HELOC | A revolving line secured by home equity | Credit availability, actual borrowing and cash reserves |
| Home-equity loan | A loan secured by home equity, generally advanced as a lump sum | The loan's payment and any existing mortgage payment |
| Cash-out refinance | A new mortgage replacing the existing one, with additional funds paid out after applicable deductions | The new loan's terms and the prior mortgage's terms |
These labels do not determine the rate, fees, approval or permitted use of funds. The actual loan documents do.
What are reserves?
Reserves are funds retained for future needs. Household reserves may concern ordinary obligations or unexpected expenses. Property reserves may concern repairs or replacements. A lender may also use “reserves” for assets required to qualify for a mortgage.
A lender's minimum is a qualification rule. It does not establish how much cash a particular household should retain. Borrowing capacity and reserve money should not be treated as interchangeable terms.
What are loan-to-value ratio and debt service?
Loan-to-value ratio compares a loan amount with the property value used by the lender. Combined loan-to-value takes multiple secured loans into account. The lender's value and eligibility rules can differ from an online estimate.
Debt service is the required payment on a debt, including principal and interest as applicable. A cash-out refinance can change the terms of the existing mortgage as well as increase the amount borrowed.
Professional boundary
A property's equity does not establish whether borrowing is appropriate or affordable. Westin can discuss the property context; the lender and qualified financial, tax and legal professionals address loan terms and conclusions for your circumstances.