You’ll often hear homeowners talking about tapping into their home’s equity to solve a variety of financial problems. But, what exactly is home equity? And if you do tap into your home’s equity, how can you use those funds?
There are several ways to access your home’s equity, including a Home Equity Loan and a Home Equity Line of Credit (HELOC). Both options are similar, but each has its own pros and cons.
What is Home Equity?
Home equity is the difference between the appraised value of a home and what you currently owe on the house. For example, if your home’s value is $450,000 and you owe $200,000 on a mortgage, your home’s equity will be $250,000.
However, you may not be able to borrow this entire amount. Other credit factors and lender limits will determine the exact amount you’re able to borrow. At Money FCU, we will let you borrow up to 90% of your equity.
Home Equity Loan vs. HELOC
While there are several ways to access the equity in your home, two of the most common methods are through a traditional Home Equity Loan and a Home Equity Line of Credit (HELOC).
With a Home Equity Loan, the borrower receives all the loan proceeds upfront in a lump sum. You agree to make fixed payments within a specific time until it is paid in full. This option is ideal when you know the exact cost of a project upfront – for example, putting in a new pool.
With a Home Equity Line of Credit (HELOC), you receive a line of credit loan to use when you need it. Then, you can use as much or as little of the amount as you want, whenever you want. You only repay what you actually spend. This option works best if you have ongoing projects or simply want to use the line of credit as an emergency lifeline.
Because these are home loans, the interest rates and terms are typically much better than unsecured loans, such as credit cards or personal loans.
Ways to Use Your Home’s Equity
When it comes to how you will use your home’s equity, the sky is the limit. Here are some of the more common ways people put their home equity to work for them.
1) Home Repairs
If you need home repairs, utilizing your home’s equity is a great way to pay for these fixes. You can use your home’s equity for anything, including plumbing issues, a leaky roof, broken windows, or anything in between. If you just need a quick loan for a smaller dollar amount, a home improvement loan might be better for you.
2) Home Remodels / Upgrades
Home remodeling requires a lot of money that may not be readily available to you. Whether you’re looking to remodel your kitchen or a bathroom, using the equity in your home to pay for these upgrades is the perfect low-cost solution. Plus, quality home upgrades can help raise the value of your home even more. If your project is on the smaller side, a home improvement loan might be a better option.
3) Debt Consolidation
You may also consolidate debt with a home equity loan. If you have significant high-interest debt, utilizing your home’s equity to consolidate these debts can provide a more flexible and lower-cost option.
4) Higher Education
Some homeowners use these loans to pay for college tuition, especially since the interest rates are considerably lower than many student loans. Additionally, some equity loans may also have more flexible repayment terms than those offered through student financing.
Events such as weddings may need a financial boost to meet set budgets. Instead of opening a credit card or obtaining an unsecured loan to pay for these events, it may be a better, less expensive option to utilize your home’s equity.
Whether for a family, couple, or individual vacation, you can use your home’s equity to help pay for your travels. However, we do not recommend this option unless you are financially prepared to pay it back quickly.
7) Business Investment and Growth
Some business owners use home equity loans to grow their businesses and improve their revenues. In return, the proceeds from the company can also typically be used to pay off part of the loan.
8) Future Investments
You can also use your home’s equity to purchase property as an investment strategy. However, before making such a decision, it’s imperative to understand the returns and risks involved in such investments.
9) Medical Expenses
The cost of healthcare continues to rise each year. Medical bills, unfortunately, are a common reason people experience financial hardship. Using the equity in your home is one strategy to regain control of these expenses and repay them over a more flexible time period.
10) Emergency Lifeline
If the pandemic taught us one thing, it’s that nothing is certain in life. Good paying jobs may abruptly end. A home equity loan, especially a HELOC, provides you with an emergency lifeline. With a HELOC, even if you don’t need the money now, the line of credit is available to you for usually up to ten years. It can provide peace of mind knowing you have access to emergency, low-cost funds should you need it.
While home equity loans provide a lower-cost option than most other loans, it’s important to remember that your home is used to secure the loan. If you fail to repay the home equity loan or HELOC, you could be at risk of losing your home. It’s vital to assess each loan option’s pros and cons to make sure it makes sense for your unique situation.
We’re Here to Help
A home equity loan or HELOC are powerful loans that provide larger sums of money affordably. With lower interest rates and longer repayment periods, they can help you overcome financial challenges or build even more value in your home through remodels.
Before deciding if a home equity loan is right for you, please contact our Home Loan Team. We’ll walk you through the entire process one-on-one and answer all your questions. To get started, you can visit our Home Equity page, or call, text, chat, or stop in, 9am-4pm, Monday through Friday.
Each individual’s financial situation is unique and readers are encouraged to contact the Credit Union when seeking financial advice on the products and services discussed. This article is for educational purposes only; the authors assume no legal responsibility for the completeness or accuracy of the contents.