What is home equity?
Home equity refers to the amount you've paid off on your house. It's the difference between the value of your home and the amount owed on your mortgage. Home equity is a vital strategy for many people to grow personal wealth over time. Your equity grows when the value of your house rises over time and you pay down the principle on your mortgage.
According to Glenn Brunker, president of Ally Home, “equity presents many opportunities to homeowners because it is a fantastic source of savings and financing.” For example, when a family develops and requires more room, the equity built up in a starter home may be used to fund the down payment on a larger property.
How home equity works
A HELOC, a home equity loan, or a cash-out refinance are the most typical ways to access the equity in your home.
To use one of these options to access your home's equity, you'll need to go through a process that's quite similar to getting a mortgage. You can apply for a home equity loan through a bank, credit union, internet lender, or another financial organisation that provides these services.
“A person's debt-to-income ratio, loan-to-value ratio, credit score, and annual income will all be taken into account by lenders,” says Michele Hammond, senior home lending advisor at Chase Private Client Home Lending.
Calculate your equity loan by using equity loan payoff calculator
Home improvements:
One of the most typical reasons for homeowners to take out home equity loans, or HELOCs, is to enhance their homes. Aside from making a home more comfortable for you, renovations may increase the home's worth and attract greater interest from potential purchasers if you decide to sell it later.
Brunker argues that “home equity is a wonderful choice for financing significant projects like a kitchen makeover that will boost a property's worth over time.” “These investments frequently pay for themselves by boosting the value of the home.”
College costs:
If your lender allows it, a home equity loan or HELOC could be a wonderful option to pay for college. While student loans are still the most prevalent way to pay for college, Matt Hackett, operations manager at mortgage lender Equity Now, believes that using home equity “may still be advantageous when mortgage rates are much lower than student loan interest rates.” “It can also reduce the payment by extending the debt's duration.”
Debt consolidation:
A home equity loan, often known as a HELOC, can be used to consolidate high-interest debt at a reduced rate. Homeowners may borrow against their equity to pay off personal debts such as auto loans or credit cards.
“Another extremely popular use of home equity is to consolidate debt at a much lower rate over a longer period of time and dramatically cut monthly payments,” Hackett explains.
Why would you utilise home equity for this? If you have a large amount of unsecured debt with high interest rates and are having problems making payments, consolidating that debt at a reduced interest rate could save you money each month.
Emergency expenses:
Most financial experts believe that you should have three to six months' worth of living expenses in your emergency fund, but this is just not the case for many Americans.
A home equity loan may be a wise method to keep afloat if you find yourself in a pricey circumstance, such as being laid off or having big medical expenditures. This is only a viable option if you have a backup plan in place or if you know your financial condition is just temporary. If you don't have a repayment plan in place, taking out a home equity loan or HELOC to meet emergency needs might lead to substantial debt.
Wedding expenses
For some couples, a home equity loan or HELOC may be the best option for covering wedding costs. According to The Knot's Real Weddings survey, the average wedding cost in 2020 was $19,000, down from $28,000 in 2019 before the pandemic. This isn't even taking into account the typical expense of a honeymoon.
Some couples use wedding loans or personal loans for weddings to pay for this once-in-a-lifetime occasion. Because they are unsecured — not tied to an asset — the interest rates on these loans are often higher than those on home equity loans and HELOCs.
