Using Home Equity Wisely
As a homeowner, you’re probably sitting on a great deal of money: your home equity. Did you know you can use home equity to pay off debt, or even as a down payment on a second home? There are nearly as many ways to use the equity in your home as there are ideas of how to spend it. But it’s important to use your home equity wisely.
Here are some ideas on how to use home equity to reach your goals without getting in over your head.
How to tap into your home’s equity
There are two main ways to tap into your home equity (without selling your home). Each method gives you access to the difference between what you owe on your mortgage and the current market value of your home, otherwise known as your equity in the home.
Home equity loans
The first way is through a home equity loan. A home equity loan is a lump sum cash payment. You take out the loan in one large sum and then repay it in regular monthly payments, with interest. Home equity loans are installment loans, and they may be accompanied by fees, such as origination fees or servicing fees. Lenders typically offer home equity loans in larger amounts -- perhaps starting at $25,000 to $40,000, depending on the lender.
Home equity lines of credit
The second method is a home equity line of credit (HELOC). It’s slightly different from a home equity loan in that it is not an installment loan, but rather an open credit line, similar to the way a credit card works.
With a HELOC, you have access to funds as you need them, rather than via lump sum. You owe interest only on the amount you borrow, not the whole amount available to you. So you can borrow a smaller amount, pay it back, then borrow another amount and pay it back. Or, you can borrow what you need during the draw period (up to 10 years of time), and then pay it back during the repayment period.
When it’s a good idea to use your home equity
Sometimes it’s a good idea to tap into your home’s equity, which would otherwise be unused and inaccessible to you. There are several excellent reasons to borrow against the value of your home.
For example, if you dip into the equity of your home and then use those funds to improve your home, you’re doubling down on its value. Using the existing home equity is a popular way to finance kitchen renovations or other big home improvements, including repairs and remodeling.
Another useful function of home equity lending is to consolidate and pay off high-interest debt. Using home equity to pay off debt allows you to get out from under these constrictive payments, reducing your overall debt load and decreasing the amount of interest you’ll pay over time.
Sometimes people find themselves in unexpected situations, with a need for large amounts of cash. For example, if you have lots of medical debt to pay off, a home equity loan can help. Similarly, if you have a once-in-a-lifetime business opportunity, a home equity loan might be a way to get the one-time infusion of cash you need to get the business off the ground.
A second home
If you’re responsible with your finances, you can even use a home equity loan to buy investment property or a second home. With a required down payment of 10 to 15%, depending on use, home equity financing could be the solution. This could allow you to increase your income with a rental property or give you a vacation home in the area you’ve always wanted.
Just keep in mind that this method requires you to juggle multiple mortgages, and that could put your primary home at risk.
When it’s not a good idea
If there’s a chance that the additional debt could put your home at risk, that’s a huge red flag. Similarly, using a loan to fund whimsical, expensive, or unnecessary things, such as vacations or luxury goods, is a bad idea. That’s because the interest you’ll pay will make them even more costly, and there’s little to no return on your investment.
Finally, don’t use a home equity loan to solve monthly cash flow problems; you’ll be better off figuring out how to cut expenses or increase your income. Borrowing merely kicks the can down the road.
How to choose the right option for home equity lending
There are many options for home equity financing. Which one you choose will depend on your circumstances. The choice you make will also have an effect on your bottom line, in terms of total interest paid and other terms.
At Consumers National Bank, we offer home equity loans and HELOCs with competitive rates and terms. The rates on our home equity financing is typically much lower than for an unsecured personal loan you might find elsewhere, and you may be able to borrow up to 85% of the value of your home.
Plus, we’ll waive the closing costs on loans of $25,000 or more -- that’s an instant savings. Our lending agents are highly experienced in the local lending industry and we are proud to offer a simple, easy application process. Consumers National Bank will also waive the fee for your first year.
If you’re looking for an affordable home equity financing solution, contact us today.