Home equity is the current value of your home, minus what you owe on your mortgage. It is typically known as a homeowner’s greatest asset because it can help you build wealth over time, as you pay off your mortgage loan, and as your home value increases due to market value. Since your equity is an asset, it is important to know how you can use it.
What is a Home Equity Loan?
One of the ways you can access your home’s equity is with a home equity loan. This type of loan can sometimes be referred to as a second mortgage because it uses the equity in your home as collateral and is similar to a conventional fixed-rate mortgage. Your loan payment will be on top of your regular monthly mortgage payment, so you’ll have two monthly payments to make.
With a home equity loan, you’ll get a lump sum, with a fixed interest rate and fixed payment schedule over the life of the loan. It’s a great way to convert the equity you’ve built in your home into cash, so you want to make sure you invest that cash wisely.
3 Best Uses for a Home Equity Loan
Home Improvements
This is one of the most popular ways to use your home’s equity. Whether you want a brand new kitchen, a dream backyard, or a four-car garage, your home’s equity is a great source of funds for these projects. Plus, home improvements can add value to your home giving you additional equity.
Debt Consolidation
If you have multiple forms of debt, especially high-interest ones, like on credit cards, this may be a great option to reduce some financial stress. You’ll be able to consolidate all of your debts into one monthly payment and you’ll get a low rate since your home is used as collateral.
Emergency and Family Expenses
Your home’s equity can help you pay for unexpected medical emergencies or other family expenses. Maybe you need some cash to proceed with a fertility treatment or adoption, or to help pay for an assisted living or home health provider. A home equity loan can be a way to quickly get the money you need.
Use It Wisely
While using the equity in your home can be a great way to fund major expenses or consolidate debt, we can’t forget about risks. A home equity loan does come with the risk of a foreclosure on your home if you can’t make payments. Be sure to immediately contact your lender about a forbearance plan if you encounter a situation such as a job loss or illness that may prevent you from making your payments.
Want More Info?
Talk to us about your personal financial situation and we can advise for or against a home equity loan for you. We can review your credit report with you and see what makes sense. Contact us to schedule an appointment.