How to Unlock the Equity in Your Home

With Spring right around the corner, now’s a good time to tackle those home improvement projects you have been putting off. If only there were room in your budget to do so, right? Good news! Maybe there is, beyond asking family members for a loan or winning the lottery, that is. If you currently own a home, one source of funds you may have overlooked is your own home equity.

What is Home Equity Exactly?

Your home equity is the difference between the estimated market value of your home and the amount that remains on your mortgage. For example, if the market value of your home is $800,000 and your remaining mortgage balance is $200,000, the value of your home equity is $600,000. That sum may be available for you to tap into, for home remodeling projects, or other personal expenses.

Why Take Out a Home Equity Loan?

First, ask yourself if you would be able to list and sell your home, as is, at the top end of your valuation range. If not, consider which home remodeling projects would bring you the most return on investment, and consider addressing those prior to applying for a Home Equity Loan. Also, assess your immediate and long-term needs for home maintenance and renovations. Once you determine your project needs and cost estimates, a loan might be a desirable option. Low-interest rates make borrowing against your home’s equity, an attractive option.

How Can I Access My Home Equity?

Home Equity Line of Credit (HELOC)

One option for accessing your home equity is with a Home Equity Line of Credit, commonly referred to as a HELOC (He-Lock). A line of credit is defined as a preset amount of funds that a bank or other financial institution agrees to lend a borrower. Like a credit card, the borrower is then able to draw upon these funds as needed, up to the maximum loan amount. Typically, borrowers are charged a variable interest rate. Often this means a lower interest rate initially, which may increase after the introductory period, depending on how the lender determines their rates. A borrower is charged interest only when the funds are used and are required to make monthly payments to repay the loan. As you do so, the total amount of funds is again available for use.

Home Equity Loan

A home equity loan is similar to a HELOC with these differences: Instead of drawing on funds as you need to, the lender of a Home Equity Loan provides the loan in one lump payment. Interest rates are typically higher than for a home equity line of credit because the borrower is offered a fixed, rather than variable, rate. The borrower then has the security of knowing that the interest rate will not fluctuate over the time period of the loan.

Cash-out Refinance Loans

If you qualify to refinance your current loan for a lower interest rate, a cash-out refinance loan allows the homeowner to pay off their present mortgage for a new mortgage loan for a larger amount than you owe on your home. The borrower receives the difference in cash a one-time payment that can then be used for home improvement projects.