Home equity loans and lines-of-credit are popular tools homeowners use to gain access to extra money. The equity in your home is the value of your home minus how much you owe. If you have equity in your home, you can borrow money against your equity for home renovations, repairs or pay down debt. Here are a few tips that will help you use your home’s equity to your advantage.

Learn How These Loans Work

Home equity loans are not free money. It is money you have paid over time to build an equity claim in your house. Although you are technically the owner of your home, your equity is the true measure of your ownership stake.

There are several ways to borrow against the equity in your home. The two most common ways are home equity loans and home equity lines-of-credit (HELOCs). A home equity loan is a second mortgage you take out against your home’s current equity. Once you are approved, you receive the loan proceeds in one lump-sum payment. These loans have fixed interest rates and act in a similar manner to your first mortgage.

HELOCs give you a chance to establish a line-of-credit based on the total equity in your home. HELOCs are similar to credit cards but offer much lower interest rates. You can access your equity whenever you need it as long as it is not during the repayment period established by your lender.

Using Equity to Slash Interest Rates

Most HELOCs have lower interest rates than credit cards or unsecured personal loans. Many homeowners use their equity to pay off high-interest debt at a much lower rate. It is smarter to pay your mortgage lender each month at a reduced rate instead of paying higher rates to multiple finance companies. However, it defeats the whole purpose if you start making big purchases with your credit cards again.

Calculating Your Home’s Equity

Fortunately, calculating how much equity you have in your home is simple. First, find out the current market value of your home. You can pay to have your home appraised, or you can ask a real estate agent for a broker’s price opinion (BPO).

Once you know the value, subtract that amount from the current balance of your mortgage. The calculation is your home’s equity as a dollar amount. If you want to know your equity as a percentage, divide the dollar amount of your home’s equity by the appraised value.