Your home equity may be the key to unlocking all the financial opportunities you’ve been dreaming of and the only thing standing in your way is: knowing when to tap this resource.
It’s often a dilemma to many homeowners whether the time is right to utilize their home’s value. The stakes can be high and making a wrong decision could lead to great consequences to one’s financial stability. This is why it is essential to know all about home equity loans before making any moves.
In this article, we will take you through the best uses of a home equity loan: first, what factors to keep in mind and then, when would be the best time to go for it. Additionally, we’ll also give you some insider tips to get the most out of it.
What is Home Equity Loan?
A home equity loan is a kind of second mortgage, which allows a homeowner to borrow on the equity that one has tied-up in the property. Such loans are usually offered in a lump sum payment requiring a fixed interest rate and repayment period.
- How it is Different from other loans?
| Loan Type | Interest Rate | Disbursement | Collateral |
| Home Equity Loan | Fixed | Lump sum | Home |
| HELOC | Variable | As needed | Home |
| Personal Loan | Fixed or Variable | Lump sum | Unsecured |
| Cash-out Refinance | Fixed or Variable | Lump sum | Home |
Home Equity loans are different from other loan types in many ways. Like:
- It uses Home as collateral, unlike personal loans
- It provides lump sum, unlike Home Equity Lines of Credit (HELOCs)
- They do not replace your existing mortgage as compared to cash out refinancing
- Benefits and Risks
Benefits of Home Equity Loans include:
- Low interest rates as compared to credit cards or personal loans
- Fixed payments to manage budget
Risks of Home Equity Loans
- Foreclosure possibility if you default on payments
- Reduction in home equity
- Risk of owing more than your Home’s value if property prices are decreased
Best Scenarios for Using Home Equity Loans
Home Improvements or Renovations
Home equity loans are the best option if you are planning for any renovations or improvements in your house. Doing so, will not increase overall look of the house but, it will also increase the value of the property. If we renovate our house, we have 70-80% average of Return on Investment.
So it is ideal to get home equity loan if we are planning to make little bit changes in our overall house look to increase the value.
Debt Consolidation:
Another ideal scenario to use Home Equity Loan is to consolidate high-interest debts. By doing so, you can:
- Reduce overall interest rate
- Improve credit score by reducing credit usage
Emergency Funds and Major Expenses:
- Home Equity Loans are good to cater major life expenses such as college tuition fee or business expenses
- It is ideal for medical emergencies
- Temporary job loss
- Essential home improvements and repairs
Things to Consider Before Going for H.E.L
Before obtaining a home equity loan, it is crucial to assess your current financial situation, including income stability, existing loans, and monthly expenses. Compare interest rates and loan terms offered by different loan providers, considering both fixed and variable rates.
Consider the loan type, which can have pros and cons, such as fixed-rate payments and variable-rate payments. The home value and equity percentage are also important, with lenders requiring at least 20% equity after the loan.
Other than this, alternative financing options, such as personal loans, credit cards, cash-out refinance, and home equity lines of credit (HELOC), are also options that can be considered. Simply, align the use of a home equity loan with your long-term financial goals, such as home improvements, debt consolidation, or funding education as mentioned earlier.
Remember, the optimal timing for taking out a home equity loan will maximize its benefits.
How to Calculate Home Equity?
To calculate home equity, first find the current market value of your home. You can use different online home price estimator or a licensed appraiser for an accurate assessment. Then, subtract your mortgage balance from the current value by checking your mortgage statement and subtracting the amount you still owe on your mortgage and other debts.
This will give you your home equity. For example, if you bought a home for $390,000 with 3% down payment and a 30-year fixed rate mortgage at 6.99 percent, you would have $11,700 in equity.
Five years later, the home’s value has appreciated to $440,000, and you still owe $359,000 on your loan. At this point, you would have $81,000 in equity ($440,000 – 359,000).
Why Home Equity Loans are Getting Popular?
Home equity loans are gaining popularity due to the significant increase in property values over the past few years. In second quarter of 2024, U.S. homeowners saw their equity increase $1.3 trillion in value, a gain of $24,000 for the average borrower.
Mortgage rates have also increased significantly since the pandemic, impacting the cost of cash-out refinancing. Although HELOC and home equity loan rates have increased, they remain more affordable than other forms of financing and can be easily obtained as well than refinancing.
Additionally, homeowners don’t need to give up their low-rate mortgage.
Get Help with Frugalwave.com
If you’re looking for a home equity loan and feel overwhelmed by the options or uncertain about the process, Frugalwave.com can help you with choosing the right option.
Whether you’re looking to fund home renovations, consolidate debts, or handle unexpected expenses, we have a detailed guide for every step. You can find helpful articles at Frugalwave.com and it offers all discounts and coupons at a single place.
Check our coupons related to different products and services and save huge amount using all of them at once.