Equity in your home is one of your most valuable assets. You can use the value of your home to build a good credit history and score as well as plan for the future. People commonly use the value of their home to plan for retirement or as investment to build wealth. How much to borrow is a question that constantly nags at homeowners and should be considered carefully before entering into any binding agreement.

What is Your Home Worth?

Before looking at home much you can borrow against your home, you should consider how much your home is worth. A common mistake homeowners make is assuming the value of their home is based on the current market value. This is the value of your home but the market rate does not determine how much equity you have in your home. Home equity is based on the current market value minus how much you owe on your home. An example would be if your home is worth $285,000 and you owe $195,000, then the equity you have left in your property is $90,000. This is the formula that makes up the basis of any home equity loan you might pursue.

What is a Home Equity Loan?

A home equity loan is borrowing against the equity you have remaining once the balance owed on your mortgage is subtracted from the market value of your home. There are two types of home equity loans, a traditional loan and a line of credit. A home equity loan, involves a fixed payment at a predetermined interest rate for a set number of years. In a home equity loan, the homeowner pays the lender a set amount each month, using property as equity in the event of default. In a home equity line of credit, there is a maximum amount a homeowner can draw from and payments are based on how much of the equity is drawn. Homeowners can use lines of credit as they would a credit card, repaying as they borrow. Typically, these agreements tend to feature variable interest rates based on the prime interest rate and the monthly payment can fluctuate.

How Much Can you Borrow?

Since everyone's situation is unique, there is no simple answer but there are a set number of variables you can use as guidelines when looking at how much you can borrow. Several factors directly influence your borrowing power. How good is your credit? An excellent score will land you better terms. The interest rate on the home equity loan will be determined by your credit history--the higher your credit score, the lower the rate, so you'll want to know your score before inquiring. The type of loan will also determine how much credit you will qualify to borrow. You can choose from fixed rate 30- and 15-year terms or go with a shorter term ARM loan. Finally, your annual income, your total liquid assets and your regional real estate market all play a part in your burrowing power. In the end, how much you truly feel comfortable borrowing depends on how much debt you can handle and how favorable a term you can get from your lender.

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Real Estate Owner: Home Equity