Home Equity Options
Getting into Springtime often signals people doing home improvement projects. This could be small projects are even larger ones. Many people choose to use the equity in their home to fund their projects and this can be done in a variety of ways.
Let’s start with the word equity means. In the simplest terms, equity is the difference in how much your home is worth and how much you owe on your mortgage. For example, if your home is worth $200,000 and you owe $150,000 on our mortgage, then you would have $50,000 equity in your home.
You equity can go up in couple of ways. One, of course, is by paying down your mortgage. It can also go up if the value of your home rises. It’s worth noting that the value can also go down. If the value of your home goes down faster than you pay the mortgage that can affect your equity.
Keep in mind, if you ever decide to use your equity, a real estate appraiser will have to evaluate your home and determine its current value in order to move forward with a lender.Building equity is a process and will take some time but it does grow and usually before you know it.
There are a few ways to build equity.
1. The bigger the down payment you make when you purchase your home, the more equity you could have right away as it lessens what you would owe on your mortgage compared to the value of the home.
2. Paying off your mortgage is another way. The longer you pay, the more of the payment that actually goes toward the principle of the loan. As the principle goes down you are building equity.
3. If you pay more than the minimum you can chip away at the principle faster.
4. Of course, the longer you are in your home the easier it is to build equity. As we stated, this can take time, so the longer you stay the more equity you will build. It’s often recommended that you plan to stay in your home at least 5 years to see the home value boost, and help the equity. There is no guarantee the value of your home will go up, but odds are it will if you keep it in good repair and your neighborhood doesn’t see drastic changes.
5. Improvements on your home can increase the value, therefore helping your equity. Updating a kitchen or bathroom can add value. Something as simple as investing in your landscaping can help your curb appeal as well.
So how can this be helpful? There are actually a few ways.
1. Equity can be used toward the purchase of a larger, more expensive home. When you leave the closing table from the sale of your current home, the equity you’ve built can result in a nice profit which can help you make a bigger down payment on the new home.
2. Some people use equity for retirement by using a reverse mortgage. Your lender can send you the funds from a reverse mortgage in one lump sum, a series of payment, or a combination of those. The rub is, the lender adds interest to your balance each month and of course, it decreases the equity. Typically the money you receive this way is tax free. The loan is generally repaid once the home is sold or the occupant moves out. This is often done by an estate, spouse or co-borrower. These can be a little difficult to navigate and there is more than one way to set up a reverse mortgage. We recommend you see a professional before taking out a reverse mortgage. Make sure you understand your options and exactly how the terms will work.
3. You can also borrow against the equity with a cash out refinance. In this instance you refinance your home for more than you owe on your mortgage and you receive the extra money. That extra is your equity you had in the home. People often use this money for things like paying off debt, paying for college or other big ticket items. Once the refinance is done, you continue to have a single mortgage payment.
4. You can also do a home equity loan which is similar to a 2nd mortgage. Let’s say you have $60,000 in equity in your home and you are approved for $50,000 for a loan. The lender then gives you the cash in a single payment to use as you wish. This loan is repaid in monthly payments and is in addition to your original mortgage. Make sure you have the budget to pay this additional note. If it’s a debt consolidation, it may work out great as the one new payment is probably lower than what you were paying before. And often this would be at a better interest rate than what you would get on a personal loan to do the same thing.
5. Lastly, you can also use a home equity line of credit, or HELOC. As a line of credit, it is similar to a credit card but your credit limit depends on the equity in your home. Let’s say you have $50,000 in equity and you are approved for $40,000. You don’t have to use the entire $40,000. Perhaps you are using this for a kitchen renovation and it only costs $20,000, then you only have to use that much and that is all you will be making payments on to pay it back.
Using the equity in your home can be a very appealing option. Paying off debt, paying for college, doing large renovations or even buying a larger home can come at a hefty price and the equity you’ve built can be helpful to fulfill such a goal.
As appealing as it is, it also comes with risks, primarily that your home is the collateral for these options. We recommend you speak with a mortgage professional to really look at your options and what it really means for you as far as costs, etc. Then really weigh if this is the best option for your goal. Again, you home is the collateral so if for some reason you were to default on the loan, your home is at risk. No one sets out to get a loan thinking we may someday default, but things happen. Medical issues, injury, job loss. There are so many things can lead us to a different income level that then effects how we can pay our financial obligations. So please think carefully and make sure you have all the information you need before using your home equity.
As always if you have questions we are here to help you navigate the home equity path and find the best solution for you.