The best ways to utilize the equity in your home
Your home equity is your home’s value, minus the total of outstanding mortgage on the property. You can borrow funds against the equity in your home with a home equity loan. These loans can be a useful source of money for a number of expenses, such as home improvements, education, debt consolidation, purchasing investment property, and more.
There are generally two types of home equity loan structures: fixed-rate and line of credit (HELOC). A fixed-rate home equity loan disburses a lump sum of cash at the time the loan is approved. They offer consistent monthly payments that are locked in at the same interest rate. These are best for one-time expenditures with a known cost.
A HELOC loan allows you to borrow funds against a line of credit as needed. You are approved for a maximum amount available, and only borrow what you need. Borrowers only pay interest on the amount borrowed, and the interest rate fluctuates based on the prime rate.
A HELOC is best when it’s being used for ongoing expenses. Home equity loan rates are typically just slightly higher than mortgage rates, and much lower than credit cards and other unsecured loans, making them an attractive option. Terms can range from one to 15+ years, depending on your needs and financial situation.
It is important to remember that these loans use your home as collateral, so defaulting on the loan could potentially put your home at risk. That’s why it’s essential to work with a bank and a lender you trust. The best lenders will help you determine a loan amount and payment you can comfortably afford, and explain the process thoroughly, including the terms of the loan, interest rate, and closing costs.
A home equity loan can be a smart financial decision when used correctly. Contact one of our local lending experts if you would like to learn more.