Home Equity

Thinking about borrowing money by tapping your home equity? This blog post presents 5 reasons to use home equity and it will make perfect financial sense.

Borrowing money is expensive at the moment. Bankrate recently reported that average credit card rates are above 20% and personal loans for those with excellent credit had interest rates above 10%. A HELOC or home equity loan, on the other hand, are less expensive choices.

Accessing your home’s equity to borrow money effectively gives a lender the right to foreclose on your house in the event that you default on the loan. Lenders are prepared to provide you a cheaper interest rate compared to other types of financing because they have a claim to a valuable asset.

When faced with major life needs that you just do not have the funds to pay for, it may be worthwhile to tap into the equity in your home. But is it worth jeopardizing your home’s stability for? If you want to know why taking out a loan against your house can be a good idea, read on.

How does home equity work?

The equity in your home is the sum of all of your mortgage payments less the home’s current market value. In time, you will have paid off a larger portion of your mortgage, which means you will have more equity in your property.

To get a home equity loan, you’ll need to put your house up as collateral. This is because the loan will effectively serve as a second mortgage, adding to your current payment. That’s why, before taking on any debt, it’s wise to assess your financial status and decide which expenses are worth the risk, especially if the monthly payments are out of your price range.

5 Reasons to Use Home Equity

In times of financial hardship, homeowners who own their homes can rescue themselves from the clutches of personal loans and credit by taking out equity loans. With a fixed-rate equity loan, you can borrow a certain amount of money, and with a variable-rate HELOC, you can borrow money whenever you need it. You can use either one to consolidate debt or fund a project that will take a long time to complete.

Here are five reasons to use it:

1. Home renovations or improvements

The primary perk of taking out a home equity loan to finance repairs is the ability to deduct the interest, which means you can save a ton of money. The best part is that you can enjoy your newly improved property while also seeing a rise in its worth. That bodes well for its potential appreciation in value when the time comes to sell it.

2. Debt consolidation

Paying down a large amount of high-interest credit card debt can be a lot more manageable with a home equity loan or line of credit. A home equity loan might help you pay off $20,000 in debt with three cards that have interest rates over 20%, bringing the total down to less than 8%. You can save thousands of dollars and have the convenience of one monthly payment instead of three when you consolidate your debt.

3. Higher education costs

One of the biggest costs that families have to deal with nowadays is paying for college. Home equity loans can help with this by providing upfront funding over a long period of time. The sort of loan, however, must be carefully considered. Compared to the average rate for home equity loans, the current interest rate on direct federal student loans for undergraduates is 5.5%. Borrowing against your home’s equity, on the other hand, can be a lot less expensive than private student loans.

4. Emergency expenses

An unforeseen medical bill or other unforeseen expense might put a strain on your finances, so you may want to look into getting an equity loan. However, before you do that, you should inquire about payment plans from the company, hospital, or creditor. No need to risk losing your house by getting a second mortgage if you can work out a payment plan.

5. Business-related expenses

Reinvesting the proceeds from an equity loan into your company can be a lucrative strategy if done properly. It might be an alternative to consider if you have a thorough understanding of your company’s financial situation, a well-developed business plan, and a backup plan in case you run out of capital.

Factors to consider before taking out a home equity loan

Your home’s value

Despite a two-year spike in home prices, the market is cooling down due to inflation and increasing mortgage rates. When your mortgage balance is more than your home’s market worth, you may find yourself “underwater” on your loan.

Borrowing limits

In most cases, you will be able to borrow between 75% and 90% of your home’s loan-to-value (LTV) ratio—the sum of your current mortgage total and the home’s current market value. Verify that you have the financial means to borrow a enough amount.

Spending habits

Do not rush into taking out a home equity loan if you need quick cash for non-essential purchases like a new car or a trip. Investments in things that can greatly improve your financial condition or house upgrades that will increase your property’s value are distinct from spending money on things that aren’t necessary.