What is home equity?
Home equity is the portion of a property's value owned by the homeowner. It can be calculated as the difference between the property's market value and the outstanding balance on any mortgages or loans secured by the property. For example, let’s say your home is worth $200,000, and you have an outstanding mortgage balance of $100,000. This means you have $100,000 in equity. If you take out a home equity loan for $50,000, you will still have $50,000 in equity remaining in your home. Home equity can increase over time if the market value of the property increases or if the outstanding mortgage balance is paid down. Another way to impact your home equity is a down payment. A down payment of 20% or more will instantly increase your equity, as you will own a larger portion of the home outright. Conversely, a smaller down payment means that you will have to finance a larger portion of the purchase price, resulting in less equity. Building wealth through home equity is a highly effective way. Some homeowners use their home equity to finance home improvements or other expenses, while others may borrow against it in order to consolidate other debts. There are several popular ways to access home equity.Best ways to take equity out of your home
There are several ways to tap into your home equity:1. Home equity line of credit (HELOC)
This is a revolving line of credit, similar to a credit card, that uses your home equity as collateral. You can use it for any purpose and pay it back over time, with interest. The interest rate on a HELOC is usually variable, based on the prime rate.2. Cash-out refinance
With this type of refinance, you take out a new mortgage for more than you owe on your current one and pocket the difference in cash. This can be used for home improvements, debt consolidation, or other purposes. Keep in mind that you'll have to pay closing costs on the new loan.3. Home equity loan
This is a lump sum loan with a fixed interest rate and repayment schedule. As a cash-out refinance, you'll have to pay closing costs when taking out a home equity loan. But unlike a cash-out refinance, a home equity loan doesn't replace your existing mortgage; it's in addition to it.4. Reverse mortgage
A reverse mortgage is available to homeowners age 62 and older and does not require monthly payments as long as you live in your home. With a reverse mortgage, you're tapping into your home equity but not making any monthly payments on the loan until after you move or sell the house. Upon a borrower’s death, the loan becomes due and payable at that time. The lender will notify the borrower's heirs of this, and they will have 30 days to buy the home, sell the home, or turn it over to the lender to satisfy the debt. If they are unable to do so, the lender may foreclose on the property.5. Personal loan
You could also get a personal loan to access your home equity. Personal loans have shorter repayment terms than other types of loans, so they are a good option if you need extra cash for smaller projects with an eye toward paying it back quickly. Keep in mind that personal loans have higher interest rates than other types of loans because they're unsecured. That means there's no collateral – such as your house – backing up the loan, which makes them riskier for lenders. [su_spacer size="10"][su_note note_color="#ffffff" text_color="#000000" radius="0"]Do you plan to buy a home? [su_button url="https://alexshekhtman.floify.com/apply-now" target="blank" style="flat" background="#0072ff" size="4" radius="round" icon="icon: home" icon_color="#ffffff"]Apply now[/su_button] [/su_note]
Home equity loan vs. HELOC - which is better?
When it comes to tapping into the equity of your home, the two best options are a HELOC and a home equity loan.- A HELOC is essentially a revolving line of credit that uses your home as collateral. This means that you can borrow against your home equity up to a certain limit, and as you pay off the debt, the credit becomes available again.
- Home equity loans, on the other hand, are fixed-rate loans that give you a lump sum of money that you then repay over time. Home equity loans typically have a fixed interest rate and come with closing costs ranging from 2% to 6% of the loan amount. These loans also come with repayment terms ranging from five to 30 years. Because home equity loans have fixed interest rates and payments, they can be a good option if you need to make a large purchase or consolidate debt.
