Your Home Equity – 3 Ways To Tap Into It and 4 Ways To Best Use It

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Home equity is the difference between the current value of your home and the amount you owe on an outstanding mortgage. It may increase over time as the value of your property rises. Your equity also increases as you pay down the loan.

Equity is important to keep track of because you can put it to work for you. It can be leveraged to pay off other debts you may have, renovate your home, or make other smart financial moves.

We will cover some common ways that homeowners can put their equity to good use.

How Can I Put My Home Equity to Work?

Home equity is typically used for significant expenses. It is often a more cost-effective financing option than credit cards or high-interest personal loans. Using your home equity to pay for repairs or debt consolidation can be a handy and low-cost option to borrow money at a lower interest rate. However, the best type of loan depends on your circumstances and how you want to spend the funds.

How To Increase Your Home Equity

Building equity allows you to achieve financial independence and flexibility. The more equity you have in your home, the better you will be able to weather any financial troubles that come your way.

If you want to create equity faster, one way you can achieve that is by paying more than the minimum required monthly mortgage payment on your home. This reduces the principal balance of your loan and builds equity in your home faster. You could make an extra payment each year, either on your own or through biweekly installments, or even just pay an additional amount each month.

Improving your home’s appearance from the street can add a lot to its value. Think about it this way: more people will want to buy a house that looks nice and inviting from the outside rather than one that needs work. Adding to a home’s curb appeal doesn’t have to be expensive. A few planters, a fresh coat of paint on the porch and front door, and making sure the lawn is neat can go a long way.

How To Access Your Home Equity

Home Equity Loan

A home equity loan is a second mortgage secured by your residence. A second mortgage requires a separate payment; it does not replace your existing mortgage.

Home Equity Line Of Credit

A home equity line of credit, or HELOC, is a home equity loan that permits you to withdraw funds as needed and repay the funds at a variable interest rate. As a result, HELOCs are ideal for those who require funding for ongoing home improvement projects or additional time to pay down existing debt.

Cash-out Refinance

A cash-out refinance allows you to access your equity by obtaining a new mortgage with a larger loan amount. You replace your current mortgage and are paid out the difference. As with any refinance, your new mortgage will pay off your old one, leaving you with a single monthly payment.

Best Ways To Use Your Home Equity

Consolidate High-Interest Debts

You can use your home equity to repay debts like high-interest credit cards or car loans. This is a popular way to put your home equity to work, since people can often consolidate debt at a much lower rate over a more extended period and cut their monthly costs. If you have a lot of unsecured debt with high-interest rates, like payday loans, and you’re having trouble making payments, it may make sense to consolidate payday loans at a much lower interest rate, which will save you money each month.

Home Improvement Projects

Home improvements are one of the most common reasons homeowners leverage their home equity. Home improvement projects can make your home more comfortable to live in and raise its resale value, which can pay off when you sell your home in the future.

Some home improvements, such as adding attic insulation or installing solar panels, might add more value to your property over time than they cost.

Pay for Higher Education

A college degree can be a good investment for the future, whether it’s for you or your children. A home equity loan can be a more affordable alternative to private student loans, especially if the interest rates on home equity loans are lower than those on student loans. If you choose a longer term for your home equity loan, your monthly payment could be less than it would be for a student loan.

Financial Emergencies

In an emergency fund at your bank or credit union, you should have enough money to cover your bills for about six months. But sometimes, things don’t always go as planned. If you have a financial emergency and are short on cash, you can use the equity in your home as an alternative to high-interest credit cards or payday loans. With this line of credit, you can get money to pay for repairs or surprise medical bills.

The Bottom Line

Home equity loans and HELOCs are great ways for homeowners to access their home equity. You can use the money from a home equity loan to pay for significant expenses or events in your life, to pay off high-interest debt, to make improvements to your home, or to pay for other things like school.

As with any financial decision, you should take a good look at your finance and get professional advice before making any decisions. The expert team of loan officers at First Heritage Mortgage is always happy to help with a free consultation.

About The Author: Lyle Solomon has extensive legal experience as well as in-depth knowledge and experience in consumer finance and writing. He has been a member of the California State Bar since 2003. He graduated from the University of the Pacific’s McGeorge School of Law in Sacramento, California, in 1998, and currently works for the Oak View Law Group in California as a Principal Attorney.