As a homeowner, you can use your property as a financial tool. Home equity can help you weather life’s twists and turns, from home improvements to unexpected medical bills. However, it’s important to understand how home equity works before tapping into your stake.

Generally, your home equity is the difference between your home’s current value and your mortgage balance. You build home equity by paying down your mortgage and through appreciation of the property. For example, if you bought your home for $300,000 and have paid down your mortgage to $250,000, then your home equity is $300,000.

Ways to Use Your Home Equity for Loans

You can also build home equity through a second mortgage. This is a type of loan secured by your home’s equity and typically has a fixed interest rate over the lifetime of the loan. This loan is typically available to homeowners who have a significant amount of equity in their home and are creditworthy.

To qualify for a home equity loan, you’ll typically need to have sufficient equity and meet credit and income requirements, just like with your first mortgage. A lender will assess your credit history and score, employment history, monthly income, and debts to determine whether you can borrow up to 85% of the current value of your home minus what you owe on your mortgage.

Borrowing against your home equity can be a wise choice. However, be sure to spend the money on expenses that will increase the value of your property. Avoid using it to pay for luxuries or unnecessary living expenses, since you could end up losing your home.