How to Use Home Equity: Understanding the Power of Your Home
At 1st Ed Credit Union, we understand the power of owning a home. Beyond the joys of having a place to call your own, home ownership can also come with profound financial benefits. Building home equity is one of the most significant financial advantages of owning a home. That equity can then be used in a multitude of ways with either a home equity loan or a home equity line of credit (HELOC). Let’s explore how to use home equity.
Ways to Take Advantage of Your Home Equity
A home equity loan and a home equity line of credit (HELOC) are both borrowing options that allow homeowners to use their home equity to receive cash. Home equity is the difference between the value of your home and the amount you owe on your mortgage, and now is the best time to take advantage of this since the average home equity is at a record-breaking high. Both loans allow borrowers to access these funds, but they work differently.
Home Equity Loan
A home equity loan is a one-time lump sum payment that is borrowed against the equity in your home. This loan is based on a fixed amount borrowed and typically has a fixed interest rate, making it easier for borrowers to budget payments. Repayment terms are typically longer than most other loans, often up to 20 years. These loans are ideal for homeowners with immediate home expenses such as extensive home renovations, debt consolidation, or unplanned emergencies.
Home Equity Line of Credit (HELOC)
A home equity line of credit (HELOC), on the other hand, is a revolving line of credit based on the equity in the home that is used for borrowing. HELOCs operate similarly to credit cards in that there is a credit limit involved, and borrowers can use the money as they need it up to the limit. The interest rate on a HELOC is variable, meaning that it may change over time. The repayment term is usually between 5-15 years. These loans are suitable for borrowers who require flexibility in their borrowing and want to pay for expenses over time or have expenses occurring over a period.
Home Equity Loan Vs. Home Equity Line of Credit
The difference between a home equity loan and a home equity line of credit is primarily in the way they operate. A home equity loan provides a fixed amount upfront with fixed interest rates and longer repayment periods. On the flip side, a home equity line of credit offers flexibility because it is based on a revolving line of credit with a variable interest rate.
Uses of a Home Equity Loan
1. Home Improvement Projects
Spring is the perfect time to tackle those home renovation projects you’ve been putting off. Use a home equity loan to remodel your kitchen, build a new deck or add a swimming pool to your backyard.
2. Emergency Home Repairs
Did you know that the average household spent roughly $6,000 on home maintenance and repairs last year? Don’t let these unexpected repairs cause stress and financial hardship. A home equity loan can help you with the unexpected, and with a fixed interest rate and monthly payments it can reduce the amount of financial hardship.
3. Debt Consolidation
If you have high-interest debt, such as credit card debt, consolidating it with a home equity loan can help you save money on interest and pay off your debt quicker with a fixed payment.
4. Big-Ticket Purchases
Whether you’re looking to buy a new car, finance a child’s education or take a dream vacation, a home equity loan can offer a cost-effective solution for funding large purchases.
5. Start a business
If you’re an entrepreneur looking to start or grow your own business, a home equity loan can provide the funds needed to invest in your company.
Uses of a Home Equity Line of Credit
1. Home Improvements
With spring in full swing, it’s a great time to tackle those home improvement projects you’ve been putting off. Whether it’s a new kitchen, bathroom, or outdoor space, you can use your home equity to finance your upgrades.
2. Emergency Funds
A HELOC can be a financial safety net to cover unexpected expenses, such as medical emergencies, car repairs, or job loss.
3. Education Expenses
College tuition costs continue to rise, making it difficult for many families to pay for their children’s education. Homeowners can use their home equity to pay for college tuition or other education expenses.
4. Investment Opportunities
If you’re interested in investing in the stock market, alternative investments, or real estate, a HELOC can provide you with the funds needed to capitalize on these opportunities.
5. Debt Consolidation
Similar to a home equity loan, using a HELOC to consolidate high-interest debt can help you save on interest and pay off your debt faster. The American household debt hit a record $16.9 trillion at the end of 2022. Don’t let debt hold you back. As summer heats up, clear out your old debts with a HELOC.
Whether you choose a home equity loan or a home equity line of credit, it’s essential to consider your repayment terms, interest rates, and other factors before borrowing. Remember, your home is more than just a place to live – it can also be a powerful financial asset. Ensure you take full advantage of your home equity to help achieve your financial goals.
At 1st Ed Credit Union, we are committed to helping our members make informed financial decisions. If you are interested in learning more about using your home equity or would like to discuss your options, please contact us today.