How to Use Home Equity

Unlocking Potential: Smart Ways to Use Your Home Equity

Home equity, the difference between your home’s value and the remaining balance on your mortgage, can be a powerful financial tool. Whether you’re looking to fund home improvements, consolidate debt, or cover significant expenses, tapping into your home equity offers a versatile solution. Understanding how to effectively and wisely use this equity is crucial for maximizing its benefits while minimizing risks.

In this article, we’ll explore various strategies for leveraging home equity, outline the types of loans available, and provide tips to ensure you make informed and beneficial financial decisions.

What Is Home Equity?

Equity is the difference between what you owe on your mortgage and what your home is valued at. 

Home equity is not just what the house was worth when you purchased it. Equity is about the appraisal value. The equity will be higher if your neighborhood has become affluent or done home improvement or repair.

How to Build Home Equity

There are two routes to building home equity. These are 1. lower your mortgage or 2. raise the value of the home. Below we will discover the ways to achieve this.

Mortgage Payments

Paying off the mortgage is the simplest path to equity. If you are trying to build equity fast, consider making a larger payment than required. The faster the mortgage is paid, the more equity will be available.

Down Payment

The higher the down payment, the more equity from the start. The higher equity is a major benefit to making a downpayment in the 15-20% range. 

Home Improvement

Repairs, both cosmetic and practical, are an easy way to increase your home’s value. Improvements such as new cabinets and countertops, new appliances, re-designing the flower beds, or even a pool can increase a home’s market value. 

How to Access My Home Equity?

Equity determines how much net gain you would have from selling your house. However, there are other ways to capitalize on it. The three methods to access equity are a home equity loan, a home equity line of credit (HELOC), or a cash-out refinance.

Home Equity Loan

It is similar to a primary mortgage, except that the creditor charges a higher interest rate. This is because the lender’s risk doubles. The borrower will also pay closing costs.

HELOC

A home equity line of credit functions like a credit card, however, with lower interest rates. HELOCs are secondary mortgages, but you take out the amount you need. They often are offered as a card or a checkbook to make withdrawing funds easier. Out of all the options, this is by far the most flexible. It does not offer the same reward level as credit cards, but it is accessible and with low interest.

Cash-out Refinance

This route allows you to gain capital without requiring a second mortgage. Cash-out refinancing involves trading out your existing loan for a larger one. Many lenders consider this to be a high-risk debt.

How Can Home Equity Be Used?

Homeowners often use equity to consolidate their debts, fund home improvements, or invest in real estate. 

If you need a lump sum, a cash-out refinance or a home equity loan is ideal. HELOCs are the most flexible way to access equity and allow smaller withdrawals. If you are comfortable with a second mortgage, opt for the home equity loan. If you would rather just get the cash and the fees and closing costs are acceptable, along with the higher risk, then perhaps a cash-out refinance is appropriate.

What Are the Benefits of Using Home Equity?

Low-interest rates

Since you put your home up as collateral,t in most circumstances, you have lower interest rates than credit cards or personal loans.

Tax benefits

You can write off the interest if you use the loan to improve your home.

What Are the Risks of Using Home Equity?

Risking foreclosure

Since your home is the collateral, the lender can foreclose if you fail to make payments. Before beginning the process, it is important to have a plan and understand your equity.

Loss of value

If the housing market drops, your equity decreases. This means you owe more than the home is worth.

What Are the Alternative Uses for Home Equity?

Put your home equity toward:

• Student loans
• Savings
• Emergency Funds
• Business Expenses
• Weddings
• Down Payment on a New Home

There is a multitude of potential uses for home equity.