Do you ever feel trapped by your finances? Maybe you have several big home improvement projects, like you need new flooring or your air conditioning is on its last legs. Perhaps, you opened your mailbox to find unexpected medical bills. All of these expenses can add up quickly.
Luckily, if you’re a homeowner, you have a unique and powerful way to manage these costs without draining your savings. A home equity loan or line of credit allows you to borrow against the equity in your property. It makes expensive projects or large bills more affordable.
What is Home Equity?
Home equity is how much of your home that you own. You can calculate how much equity you have by subtracting the amount you still owe on your property from its current appraised value. You can use sources like Zillow to get an idea of your home’s value. But, typically, a lender will request an official report from a licensed appraiser.
Appraised Market Value of Home – Amount Owed = Home Equity
As a homeowner, you can borrow a percentage of that equity amount. For example, if your home appraises at $400,000 and you still owe $250,000 on your mortgage, your home equity would be $150,000.
$400,000 – $250,000 = $150,000
The amount of equity in your home can change regularly. There are two common ways this can happen:
- Market Fluctuations: If the value of your home increases, your equity will too. The higher your home is appraised for, the more equity you will have to borrow against. The opposite can occur if the market declines.
- Mortgage Payments: You’re decreasing the mortgage balance and increasing your home’s equity every time you make a payment. The difference between your balance and the appraised value gets bigger as the amount you owe on your mortgage loan goes down. Meaning, you have more equity in your home.
What is a Home Equity Loan?
A home equity loan allows homeowners to tap into their available equity by using their house as collateral. Since it’s a secured loan, it’s a lower risk for lenders. So, interest rates are much lower than other options, such as a personal loan or credit card.
There are two types of home equity loans:
- Home Equity Loan (Fixed): A traditional home equity loan has a fixed interest rate that will never change over the life of your loan. The funds you borrow are dispersed in a lump sum at the time of closing. Generally, this option is best when borrowing funds for a one-time project or event, such as a home remodel, putting in a pool, or paying for a wedding.
- Home Equity Line of Credit (Variable): A home equity line of credit (HELOC) has a variable rate, meaning the rate can fluctuate with the economy. HELOCs act similarly to credit cards in that you’re approved for a specific amount, but you only pay for what you use. Meaning, you don’t have to borrow all the funds at once. Instead, you only borrow what you need when you need it. Once you repay the borrowed amount, the funds become available again.
A HELOC provides much greater flexibility than a traditional home equity loan. They’re best for when you have several ongoing projects or expenses, or you want a financial lifeline you can tap into over the next several years.
How Can You Use a Home Equity Loan?
People often assume home equity loans can only be used for home-related expenses like remodels or repairs. One of the greatest perks of these loans is that they can be used for just about anything.
- Home Repairs or Upgrades: Using your home’s equity for remodels or repairs is a great way to increase the value of your home even more.
- Events: Weddings, family reunions, and vacations can be expensive. If you don’t have the cash to pay for these occasions upfront, a home equity loan can provide an affordable way to pay for them over time.
- Debt Consolidation: Save money by using a lower-rate HELOC to consolidate high-interest credit cards and other short-term loans that are eating away at your budget.
- Higher Education: A college degree is more expensive than ever, and getting a free ride is no easy task. Rather taking out hefty student loans, consider using your home’s equity to cover, or supplement, the cost of higher education.
- Financial Lifeline: A HELOC can serve as the ultimate emergency fund. You typically have up to 10 years to borrow from your HELOC, and you only pay interest on the money you borrow. So, you can open a HELOC today and not pay a dime in interest until you need it down the road. It provides peace of mind knowing you have access to a larger amount of money in case you need it.
Considerations Before Tapping into Your Home’s Equity
Home equity loans are powerful financial tools that can benefit homeowners significantly. However, it’s important to note that these loans use your house as collateral. If you cannot make your payments on time, the lender could foreclose on your home to recoup their losses.
While these loans are affordable and provide many financial opportunities, you don’t want to spend the funds recklessly.
We’re Here to Help!
Being a homeowner provides many perks, including the ability to tap into your home’s equity to make borrowing money more affordable. When used responsibly, home equity loans can alleviate financial stress and supply the funds necessary to cover major projects or unexpected expenses.
If you have questions on home equity loans or would like to determine how much equity you have in your property, we’re here to help. Call, text, chat, or top in! Our team is available 9am-4pm ET, Monday through Friday. (315) 671-4000.
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.