Home equity is the difference between the amount you owe on a mortgage and what your home is worth. It is essentially how much of your home you own. For example, if you owe $150,000 on your mortgage loan and your home is worth $200,000, you have $50,000 of equity in your home.
Not only does home equity increase as you pay down your mortgage, it can be bolstered as the value of your home goes up. However, equity can fall if the value of your home drops faster than the speed at which you’re paying down the balance on your mortgage.
Equity is an important financial tool and one of the greatest benefits of owning a home. Often, people think of using home equity only for the purpose of buying a new home, but there are many ways to use equity to reach your financial goals.
You can leverage home equity products, like a home equity loan or home equity line of credit (HELOC), to borrow what you need when you need it. The beauty of home equity lending is the unparalleled flexibility that other lending products simply can’t match.
A home equity loan will give you access to a lump sum of cash at a fixed interest rate, while a HELOC gives you access to a revolving line of credit at a variable interest rate.
When inventory is constrained, many homeowners use home equity for renovations that increase their home’s value, curb appeal, and salability down the road. This could include the bathroom or kitchen remodel of your dreams or an expansion, such as the addition of a four-season room.
In addition to home renovation or repairs, there are many other uses for home equity loans. Another common use is debt consolidation, particularly paying down something, like high-interest credit card debt, at a lower rate. According to the Federal Reserve Bank of New York, Wisconsin ranks 42nd for credit card debt in the nation, with $5,888 as the average debt in the fourth quarter of last year. The flexibility to leverage your home’s equity to consolidate debt may be an attractive option to improve your financial well-being.
Investing in educational goals or college tuition is another potential use for home equity to provide upfront funds or funds over an extended period. You should also consider eligibility for direct federal student loans and repayment responsibility.
A benefit of a HELOC over a traditional home equity loan is that you can access your established line of credit without impacting your credit score with each advance. With a traditional home equity loan, you need to reapply each time you would like to access additional funds.
Depending on your financial institution, you should be able to find great home equity rates, fast turnaround, and low closing costs. Your lender may also have loan repayment tools available to help calculate potential loan payments. Access to HELOC funds or advances can typically be done online, via card, or by check.
It is important to explore your options and choose the right type of home equity financing to meet your unique situation and goals. Before deciding on any home equity choices, speak with a loan specialist to help you carefully weigh the pros and cons of each option.
Julie McGaw, vice president consumer lending, provides financial education on behalf of Summit Credit Union, a not-for-profit financial institution that offers home equity loans and lines of credit, mortgages, and more.