Since home values are continually on the rise, it makes more sense for many Americans to tap into their home equity for financial security. The home equity line of credit is a great resource that has come back with many benefits. You can finance so many things from home improvement projects to the vacation you have always wanted with a reverse mortgage. There are consequences if you don’t turn to home equity with careful thought. You could end up owing more than your home is even worth at a certain point. That’s not giving you any value.
Smart Financial Moves
Tapping into a home equity line of credit could be a smart financial move. If you use little to none of the money it can be wise to have extra cash on hand for emergencies, considering rates are so low for home loans. It can help you to be prepared for unexpected financial setbacks. The key is to not use the money unless it’s absolutely necessary.
Good Ideas For Home Equity
- Emergency fund
- Home renovations
- Education funds (if you’ll be able to pay it back in a timely manner)
Bad Ideas For Home Equity
- Car purchase
- Random spending
If you’re expecting an increase in income and need some extra cash on hand for a purpose, using a home equity line of credit can be a good resource. Also, if you’re selling your home soon, tapping into home equity for improvement projects can help to give you a better return on the sale.
Home Equity Is Not An Unlimited Source Of Funds
Home values can change drastically with the market and the amount of demand. The amount of equity you may have can change as well, and your repayment amounts can vary drastically based on the state of the housing market. While tapping into home equity will most likely put you in the positive, you could end up in the negative if you’re not carefully prepared.
The Ways To Draw On Your Home Equity
There are 3 main ways to draw on your home’s equity. In any of these cases, you cannot borrow more than 80% of your home’s value from any lender.
This loan is exactly as it sounds; you take a set mount of cash out from your home and refinance it at the same time.
Home Equity Loan
This is a loan that is sometimes referred to a second mortgage. This usually has a fixed rate.
Home Equity Line Of Credit
This loan is like using a credit card. There’s a maximum that you can borrow, and you use money as you need it. After a certain amount of time, you can no longer draw on the money.
Refinancing your home will extend the life of your mortgage. You’ll have higher costs but end up with lower rates most often.
Questions To Consider When Thinking Of A Home Equity Line Of Credit
- Does your home need renovations?
- Is the loan rate lower than other types of loans like car loans?
- Do you need to consolidate your debt?
- Are you facing large bills like medical bills or college tuition?
- Are you starting a business?
Used in smart ways, home equity can be a great financial resource for you. Consider your options and plan your finances wisely. Your home is in fact your biggest asset!