Home Equity Loans

Homeownership comes with plenty of perks, one of those being the equity you have in your home. As another year goes by living in your home, the mortgage balance continues to be paid down, as well as hopefully the value continues to rise, thus continuing to build equity. This can be used as collateral for a home equity loan in order to secure funds without applying for a new cash-out refinance that has extended paperwork and fees or putting on a high-interest credit card that could cost you four times as much in interest by the time the balance is paid. If you are looking for funds to pull out of your home, then a home equity loan could be an option for you.

How Do I Figure Out How Much Equity I Have?

While an appraisal will figure out exactly what your home is worth, you can use an online estimator to give you a rough value of your home, which let’s say $200,000. If you look at your current mortgage statement you can see the outstanding balance, say $150,000. Dividing the two will get you loan-to-value of 75%. Unfortunately, lenders will typically only lend up to 80% of the home value, so in this case, you would be able to borrow 5%, or $10,000 to reach 80%.

You can gain or lose equity as the housing market fluctuates, especially as noted during the crash around 2009 when home values were in a sharp decline. Mortgage balances of course only change, and you continue to make payments, so many homeowners found themselves underwater, owing more than their home is worth. Values have since climbed back up again, but both lenders and homeowners alike learned to avoid overextending loan amounts.

Loan Options

If you are looking to proceed in borrowing against your home, there are two options, a home equity loan, or a cash-out refinance. Within the equity loan option, you can either opt for the traditional loan with a fixed interest rate and terms for the life of the loan, or a line of credit that works like a credit card where you are approved for a certain amount and can borrow as needed within that amount. A cash-out refinance is also an option, but you would have to weigh the closing costs against how long you plan to stay in the property to see if it’s worth the extra costs associated in taking out a new 1st mortgage.

What the Proceeds Can be Used For

The good news is that it’s your equity so you can decide where to use the funds. Many homeowners use these proceeds to pay for a long-overdue home improvement project such as finishing a basement or redoing the kitchen. This is a good option because you are likely to recoup these costs when you go to sell the home. Others use to consolidate debt, where you can combine into one payment, with interest rates lower than typical credit cards, so you’re able to get out of debt much faster and paying less over time. Some even use to pay for a wedding or even a family vacation.