Using Your Home’s Equity
Home equity, or real property value, is the current value of your home minus any outstanding mortgage value. For example, if you owe $100,000 on your home’s mortgage and the current market of your home value is $225,000, then you have $125,000 in home equity. Tapping into your home’s equity can be a smart way to put additional cash to good use.
There are a few different ways you can access your home’s equity, including:
- A Home Equity Line of Credit (HELOC) is a credit line secured by your home. Most HELOCs have an adjustable rate, interest-only payments and a 15-year draw period during which you can borrow funds. Typically, it’s easy to qualify for a HELOC if you have adequate income relative to your monthly debt. Also, a HELOC gives the borrower flexible access to money repeatedly and in variable amounts, as needed.
- A Home Equity Loan allows you to borrow a specific sum for a set term at either a fixed or variable rate. This is a separate loan on top of your first mortgage. The advantage of a home equity loan is that you’ll have predictable monthly payments and get the cash in one lump sum.
- Cash-out Refinance – This method would require you to refinance the first mortgage on your home and take cash out of the equity. A refinance can be a good idea if you can get a better interest rate; however, you will have to pay closing costs for a refinance.
Using the equity in your home for a large purchase can be a smart financial move. The number one use for home equity loans is to re-invest in your own home by doing renovations, major repairs or upgrades. This is clearly a good use of equity funds as you are putting the cash right back in your home and increasing its value.
Some people use the equity in their home to make investments, which can be wise if you can get a good return on your money and use it to build more wealth. After all, the equity in your home is not doing anything to help build your net worth if it’s just sitting there, untouched. Some investors are using the equity in their existing homes as a down payment to purchase another property that generates rental income.
Some other popular ways to use home equity money are:
- To fund higher education costs
- To buy a car or other large-ticket item that requires long-term financing
- To consolidate debt
There are pros and cons to using your home equity. While it’s often a great way to capture extra spending power for a low interest rate, it’s also critical that you use the money wisely. If you have questions about home equity financing options, contact a Uwharrie Bank Mortgage representative.