As a homeowner, you've likely heard the phrase “home equity” thrown around and you may even be considering using the equity that's accumulated in your own home. Using the equity in your home can be a great financial move for a variety of reasons. This is especially true as there are few limitations as to what it can be used for.
The most important factors of home equity are understanding what it is, how to acquire it, and the best ways to use it.
What is Home Equity?
Home equity is your interest in your home versus the current market value of the home. Your equity builds in the property as you continue to make more mortgage payments. Therefore, your total equity will be the difference in what you owe and what the home is worth. Rises in property value can also help you acquire more equity without making additional payments.
How to Acquire It
Building equity in a home is one of the best reasons for owning one. This is because you can borrow against your home's equity in the form of a loan which you can then use to finance major purchases or consolidate debt. The most important thing you should do is to continue making your payments on time, and if possible, make additional payments to help increase your equity.
When you apply for a home equity loan, you will likely be approved for a portion of your equity value but not all of it. This loan is often viewed as a second mortgage, and to acquire one you will have to pay associated closing costs. Additionally, this loan must be paid off over a set period of time or you could risk losing your house if you fall behind. If you are confident in your ability to make these payments, then this can be a great financial resource to lean on.
The Best Ways to Use Your Home Equity
- Home Improvements - This is one of the most popular uses for a home equity loan. Making major home improvements can be costly. Whether you're looking to finish your basement, remodel your kitchen, or pay for emergency repairs, it's important to have proper financing. The best part is that home improvements can add to your home's resale value in the future.
- Debt Consolidation - If you've accumulated debt through the years on multiple credit cards you could potentially be paying more in interest rates than you need to. Using your home equity loan can help you consolidate your credit card debt into one single payment. These loans often have lower interest rates. However, it's important to discuss your debt relief options with a professional advisor who can help you make the best decisions for your future.
- Major Purchases - Are you considering making a major purchase such as a big wedding, a car, or a child's college education? If so, a home equity loan may be the right option for you to use to finance these purchases. It's important to note, however, that for smaller purchases, a personal loan or savings may be the better option to use.
- Other Expenses - The possibilities of what you can use this loan for are virtually endless. For example, you can use it to pay for expensive medical bills or to start your own small business. Though these are frequent uses for the loan, they can also be risky if you are unable to pay the loan itself. Always keep this in mind when choosing a financial plan for any expenses or debt.
When considering using your home equity to finance one of the expenses mentioned above, be sure to take a careful look at your current financial state. It's also useful to work with a trusted financial expert who can help you determine if a home equity loan is the best option for you or not.