Home Equity 101
You’ve heard the term “Equity” thrown around. You don’t really know what it is. To be honest, I didn’t know what it was until recently. This is probably because I rent and do not yet own my own home. I decided to do some research (my philosophy is that you can learn anything if you just do the research), and I found out some really interesting facts, that I will now share with you!
What is home equity? A home’s equity is the difference between what is owed and what the house’s fair market price. For example, if your home is worth $150,000 and you owe $75,000 on your mortgage, then your home’s equity is $75,000.
What can I do with my home’s equity? Well, there are currently two ways you can take advantage of your home’s equity. First, you can take out a home equity loan. A home equity loan is like any other loan; it provides a certain lump sum of cash all at one time, has monthly payments and accrues a set amount of interest. The other option is something called a home equity line of credit, or a HELOC. This allows you to get cash advances and use it as a credit account. Minimum payments are easier to make, the interest is variable, and the payment plans are flexible, but, unlike other lines of credit, it expires after a certain period of time.
Why would I want to use my home’s equity? Home equity loans are sometimes called “home improvement loans.” If you want to put an addition on your home, fix it up somewhat, or do some more expensive wear-and-tear maintenance, a home equity loan is a viable option. It is also a good idea to use your home’s equity for other things that are considered good investments, like an education.
Why wouldn’t I want to use my home’s equity? First, if you are doing home improvements, make sure that you compare your home equity rates with home loan rates. If the home loan rates are better, it may be wiser just to take out a new loan. The other thing is that, if you’re going to risk your house to buy something, it should be an investment. Don’t use it to go on vacation, to buy a car, or anything else that depreciates. Your house is where you live, be wise with what you do with part of its value; you can lose your home if you don’t make payments as you should.
What does the process involve? Always talk to a professional before making any type of decision. You need to go through the financial that has your mortgage. Find one of the investment professionals to help you figure out whether you want to have a loan or a HELOC. It usually involves an application process, just like any other loan or line of credit.
Want to know more? Go to the Federal Reserve’s website with information about home equity loans.
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