Homeowner's Equity Account

A Homeowner’s equity account allows you to draw down cash from the equity you’ve built in your home. A homeowner’s equity account is similar to a home equity line of credit, in that it’s a revolving line of credit that uses your home’s equity as collateral for the money you borrow. In most cases, a homeowner’s equity account is administered by the bank that holds your first mortgage, but this isn’t always the case. The benefits of a homeowner’s equity account is that it allows you to borrow as little or as much as you need at an interest rate that is much lower than an unsecured loan (such as a credit card or personal loan).

Accessing Your Homeowner’s Equity Account

Your bank or lender will give you special checks that you use to draw down on your line of credit. After filling out the check, you either have the money transferred to your bank account or you can receive the money in cash. Thereafter, you must make monthly minimum payments (with interest) until the borrowed amount is paid off, just like a credit card. If you miss a payment, you will default.

How Much You Can Borrow with a Homeowner’s Equity Account

Your credit limit depends on the amount of equity you have built in your home. Typically, this amounts to about 70% to 80% of the appraised value of your home, less any amount you still owe on it with your first mortgage. Depending on your credit rating, you may borrow up to 125% of your home’s value, though this is considered risky for you and the lender, since if you default, the bank will not recover the full amount by selling the home.

Liens and Defaults

When you take out a loan from your homeowner’s equity account, the bank puts a lien on your house. This means that if you default, the bank can foreclose or repossess your home. However, this is a second lien - the holder of your first mortgage will be able to recover their losses before the holder of the second lien. This lien is removed once you no longer owe any money on your homeowner’s equity account.

Homeowner’s Equity Account Fees and Interest Rates

The interest rate for a homeowner’s equity account loan is often lower than a second mortgage (where you would get a single lump sum). It’s usually a variable interest rate loan that is tied to the prime rate. After any promotional period, the lender usually charges about 1 to 2 points above the prime rate. In order to establish a homeowner’s equity account, you’ll usually have to pay a sign-up fee and a yearly maintenance fee. Furthermore, you may have to pay points and additional fees each time you draw down from your homeowner’s equity account. The good news is that interest on your homeowner’s equity account loans is deductible up to a certain amount. For married, filing jointly households, you can deduct interest on loans up to $100,000. If your loan exceeds this amount, you may still be able to deduct, provided that the proceeds are put towards an eligible investment or business expense.

If you’re interested in learning more about establishing a homeowner’s equity account, get in touch with a mortgage broker near you.