It is true, there are certain things in life: taxes, death—and expenses. Even the most solid budget can hit a wall. From home improvement needs to medical bills and college tuition, life is full of unexpected and major expenses. As a solution, many homeowners are looking to their home equity to unlock funding options.
In fact, the equity in your home may be your most valuable asset. As a homeowner, the equity you have built can help restore balance between demanding expenses and available funds.
1. Home Equity is Earned Value
The equity part is the appraised value of your home minus any mortgage or loan amounts. With each year, the amount of your equity grows. For example, if your home is appraised at $200,000 and your mortgage is $100,000, the equity in your home would be approximately $100,000. Most lenders will consider up to a certain percentage or amount for a home equity loan or home equity line of credit.
2. Equity Can Help Pay Expenses
There are two ways to do this. You can use a home equity line of credit or a home equity loan. While they both provide funding, each of these options is very different. A home equity loan is paid out as a lump sum, usually repaid with consistent monthly payments. The second option is a home equity line of credit (HELOC) which works more like revolving credit. With a HELOC, the amount of years you can access the line of credit varies. Additionally, the exact time you can make advances from the Home Equity Line of Credit depends on the lender. For many people, a HELOC can provide more flexible options versus a lump-sum distribution. For the purposes of this article, we will focus on HELOCs.
3. Your Equity Works Hard with HELOC
With so much to know, here is a short list of ways a home equity line of credit can put your equity to work for you.
- HELOCs provide money, how and when you need it. Once you have a home equity line of credit, you can draw down (or use) the money however you need it. It’s there for a major expense, or to use a little now and a little later. You decide when and how to use it. The flexibility of a HELOC also provides long-term access to the credit line, and the interest may be tax-deductible (for your exact tax filing status you should check with your tax preparer).
- Depending on where you look, HELOCs have no fees - or a lot of fees. With a HELOC, you will get access to a line of credit and only pay interest on what you draw or use. The interest rate will be important to know because your payments will be based on that rate. You should also look for a home equity line of credit that has no annual fees, no minimum fees, and no fees for early payments or payoffs.
- They can help you increase the value of your home. There are two ways to increase your home equity. The first is by paying your mortgage each month. Because with each mortgage payment, the amount you own (equity) could go up, and the amount you owe (mortgage) goes down. And the second way is by increasing the value of your home by making improvements. An extension of your home, a new roof, or a kitchen upgrade could add value to your home. The HELOC funds allow you to start and complete a range of projects.
Equity as a Financial Strategy
Using the equity in your home for larger expenses can be a smart financial move. Access to funding is essential to help navigate the unexpected and larger expenses of life. And this earned equity can be put to work.
Continue to do your research and learn more about HELOCs and the range of funding options available from all sorts of organizations. Whether you need to pay tuition, make home improvements, or consolidate debt, an equity-based solution like a HELOC may be right for you.
The Key Points of a HELOC are:
- You can tap into your home equity to help cover large expenses
- A home equity line of credit (HELOC) works like revolving credit
- Your home equity is the appraised value minus any mortgage or loans
- HELOCs can provide more flexibility than a home equity loan
Disclaimer: You + Money posts are provided for informational purposes only and not intended to replace the advice of a financial, legal or accounting advisor.
* APR = Annual Percentage Rate. The APR for a Civic Federal Credit Union Home Equity Line of Credit is variable and based on Prime Rate as published in the Wall Street Journal, ten days before the end of the prior month (called the “Index”), plus a margin. Your margin will be determined by several factors including but not limited to your credit qualifications, combined loan-to-value and loan amount. The maximum APR for a home equity line of credit is 18%. Rates are subject to change daily. Civic membership must be established prior to scheduled closing. No purchase money seconds. Adequate, property and flood insurance are required for the life of the loan. The minimum loan amount for a Home Equity Line of Credit is $5,000. If your loan requires an appraisal, title insurance, or attorney fees, they must be paid at the borrower’s expense.