Maybe you’ve heard of home equity loans and lines of credit, maybe you haven’t. There’s no need to hang your head if the terms are unfamiliar to you. It’s easy to get lost in all the terminology of the financial world.
But when the discussion turns to home equity, it’s important to know more than just the lingo – especially if you’re a homeowner. Whether you just purchased your first house (congratulations!) or you’ve been in your home for decades, it pays to understand the power of your equity.
What is equity? (And why does your home have it?)
With details ranging from fixed rates and loan terms to property appreciation and market value, home equity can be a complex topic. For the sake of conversation, we’ll stick with the basic premise that your home’s equity is the difference between what your home is worth and how much you still owe on it. As your home’s value goes up over time and your monthly payments chip away at your mortgage balance, your equity increases.
It can be reassuring to know that if you ever choose to sell your home, that equity would come back to you as profit. The beauty of home equity loans and lines of credit (HELOC) is that they let you leverage that equity without requiring you to sell your home. If your house is currently worth $250,000 and you have a principal balance of $150,000, you’re sitting on $100,000 in equity. Those funds may be comforting in theory, but they can also be an effective tool for your financial future.
Does it make sense to use your home’s equity?
Since it represents debt you’ve already paid off, you may be wondering why you would ever tap into your home’s equity in the first place. That’s a fair consideration, and it’s always a good idea to discuss the decision with a trusted financial advisor before proceeding. However, there are a few key benefits that make home equity loans and HELOCs a solid financial solution:
- Because they’re considered secured debt home equity loans traditionally offer lower interest rates than credit cards and other consumer loans.
- A fixed-rate loan lets you lock in a low rate for the duration of the loan, protecting you against market fluctuations.
- If you don’t need the money in one lump sum, a home equity line of credit provides as-needed access to the funds and only requires you to pay interest on the amount you borrow.
After you secure a home equity loan or HELOC, you’re free to spend the money however you please, but some of the top uses for home equity funds include:
- Purchase a Vehicle
- Medical bills
- Emergency fund
- Education costs
A word of caution
It’s important to remember that using equity as a quick fix without considering the budgetary impact is a dangerous proposition. Since you’re using your home as collateral, it’s important to honestly assess your financial situation before rushing into a decision.