HOME EQUITY - CAN YOU USE IT?
15 Jun, 2021
Tapping into your home’s equity can be an affordable way to pay for home renovations or consolidate debt. You earn home equity by making your regular mortgage payments, making extra principal payments, and home appreciation.
Here’s how to determine if you have home equity and if you can use it.
What is Home Equity?
Your home equity is the difference between your home’s appraised value and your outstanding loan amount. You build a little equity every month with your mortgage payment, but you’ll need more than 20% equity in the home to tap into it with a home equity loan or cash-out refinance.
Here’s an example.
Your home is worth $200,000, and you borrowed $160,000 to buy it. You already have 20% equity in the home. As you pay your balance down, you increase the equity. Let’s say in a few years you paid the balance down to $145,000. You’d now have $55,000 in equity, of which $15,000 would be available to tap into with a refinance.
Why is Home Equity Important?
Home equity is the reason homes are such a valuable asset. It’s how many people supplement their retirement or build financial security. If you don’t touch the equity in your home, you’ll pocket the proceeds when you sell the home. You’d earn the difference between the sales price and the amount to pay off your mortgage, minus any closing costs.
How to Tap into your Home Equity
To use your home’s equity throughout the time you own the home, there are a few options:
- Home equity loan – This is a second mortgage on your home. You leave your first mortgage untouched and use the second mortgage to withdraw the home’s equity using up to 80% of the home’s value between the first and second mortgage. You receive the funds as one lump sum and make principal and interest payments for 10 – 20 years.
- Home equity line of credit – This is also a second mortgage on your home, but rather than receiving the funds as one lump sum, you receive them as a line of credit. It works a lot like a credit card. You get a line of credit that you can draw on as needed, making minimum payments (interest only) for 10 years. If you pay back principal, though, you can reuse the funds. HELOCs have a 10-year draw period and a 20-year principal and interest repayment term.
- Cash-out refinance – This is a first mortgage. You refinance your existing loan but for a higher loan amount, up to 80% of the home’s value. Your monthly payment increases with the higher payment, and you receive the funds in one lump sum.
Reasons to use your Home Equity
There are many reasons borrowers tap into their home equity, but here are a few of the most common reasons:
- Home improvements – Using your home’s equity to renovate your home and increase its value is one of the best uses of home equity. Many home improvements increase the home’s appraised value, which gives you an even better return on your investment because you’ll earn more equity in the home.
- Consolidate debt – If you have a large amount of high-interest consumer debt, you can consolidate it with your mortgage. Most mortgage rates are much lower than credit card interest rates, saving you money monthly and giving you one monthly payment versus several.
- Pay for large expenses – If you’re paying for college, a wedding, or saving for another large personal expense, it may be less costly to use your home’s equity and take advantage of today’s low mortgage rates versus using a credit card or taking out a personal loan.
If you have home equity, decent credit, and stable income, you may be able to use your home’s equity for other expenses or even to set aside as a liquid emergency fund.
Even if you don’t have equity right now, you’ll earn it as you keep making your mortgage payments on time and as your home appreciates. Most homes appreciate every year, but like any investment, the values may rise and fall. If you own your home for the long-term, though, you’ll likely see more equity the longer you own the home.
If you’d like to tap into your home’s equity or see if it’s possible for you, let’s connect today!
Contact Valley Mortgage in Fargo, ND
If you’ve decided it’s time to buy borrow against the equity you built up in your current home, you have options. Give us the opportunity to discuss options with you. Our Valley Mortgage professionals are happy to walk you through your options and match you up with the perfect loan program. We have many options available for borrowers with almost any credit score, amount of equity, or home financing requirements. We don’t offer HELOC or Home Equity loans, but we have many Mortgage Refinance options available that we believe you will find attractive.
Contact us for a no-obligation conversation. Valley Mortgage is the largest independent mortgage lender in North Dakota and northern Minnesota. We’ve be helping folks like you for more than 38 years. If you haven’t reviewed our website, click here. Please call us at 701-461-8450 to get all the details about home mortgages and refinancing. There’s no cost, no obligation. Valley Mortgage does all the processing right here in our Fargo, ND office.