Believe it or not, the best part about buying a home might not be getting a place to call your own. You also get access to your home’s equity, an asset that will only grow in value over time.
You can access your home equity in a number of ways and use it for several different purposes. One popular way to tap into your home’s equity is by getting a home equity loan, and if you use it right, you can take your personal finances to the next level.
In order to understand what a home equity loan is, you first have to understand home equity. This sounds like a complex financial term, but it’s not that hard to understand.
Your home’s equity is the difference between your home’s current market value and the amount you owe on the house. If your home is worth $365,000, for instance, and you owe $235,000, you have $130,000 of equity in your home. The more you pay on your home and the more your home’s market value increases, the more equity your home has.
When you get a home equity loan, you’re essentially borrowing from your home’s equity and getting that amount as a lump sum. You’ll pay it back the way you would with any other loan, and since the loan is secured, you’ll usually find that home equity loan rates are lower than personal loan interest rates.
If you’re thinking about getting a new home equity loan, though, you should be aware that since you’re drawing on your home’s equity, you are using your home as collateral. You should also know that most banks and credit unions will only let you borrow up to a certain percentage of your home’s equity. They’ll also want to do a home equity loan appraisal to make sure your home’s current market value is correct.
It’s worth pointing out that you can also access your home’s equity by getting a home equity line of credit, also known as a HELOC. This is similar to a home equity installment loan, but instead of getting part of your home’s equity in a lump sum, you’ll get a line of credit you can draw on as needed.
There’s no real limitation on how you can use the money you get from a home equity loan. However, you are putting up your house as collateral, so you need to figure out when is the best time to leverage your home equity.
This is by far one of the best ways to use a home equity loan. When you use a home equity loan to finance a home repair or renovation, you are using the existing value of your home to add even more value to it. The result is a higher selling price for your home, and potentially more equity you can draw on.
Emergencies can happen at any time, whether you’re prepared for them or not. Fortunately, you can use a home equity loan to pay for:
While putting aside money in an emergency fund is your best option for taking care of these situations, it’s good to have a home equity loan as backup in case you get hit with an expensive emergency or have to take care of multiple emergencies that happen at once.
If you have multiple debts you need to pay off, you can use a home equity loan to consolidate them. You’ll reduce the number of payments you make each month to one, and you’ll probably save some money as well, especially if you have high-interest debt like credit card debt. While personal loans are most often associated with debt consolidation, home equity loans have an even lower interest rate, and will save you even more money.
However, if you do use a home equity loan to pay off your debts, you’ll be putting up your home as collateral. You may want to talk with a mortgage lending advisor about the benefits and drawbacks of consolidating your debts with a home equity loan to make sure it’s your best option.
When you buy a home, you’re getting access to your home’s equity, which is the difference between your home’s current market value and the amount you owe. You can access your home’s equity by getting a home equity loan and use that money to fund a home improvement project, cover emergencies or potentially even consolidate your debts.
If you’d like to find out more about what a home equity loan can do for you, talk with a mortgage lending advisor at First Alliance Credit Union. They’ll be happy to talk with you about how a home equity loan can help you reach your financial goals, assist you with the home equity loan process and even show you how to easily make payments on your loan using our online banking platform and mobile app.
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