Your home is a big investment and using its equity can be a great way to access cash quickly. However, because your equity is backed by the physical roof over your head, you should be clear-eyed about how you use that cash and how much you borrow.
What is home equity?
Your home’s equity is the difference between what the home is worth and what you owe for the home. If your home is valued at $300,000 and you owe $150,000, you have $150,000 in equity. Not all of your equity is available to use—some banks will lend up to 80% of the home’s total value, and others will lend up to 95%; factors such as your credit score and lending history will help determine how much you can access.
What is a home equity loan or line of credit (LOC)?
Typically, a second loan secured by your home is either a home equity loan (which is like your first mortgage and comes to you in one lump sum) or a home equity line of credit, or HELOC, which is more like a credit card in that you can repeatedly access money and pay it back for a span of time. Although these types of loans usually have lower interest rates than credit cards or personal loans, they may have higher rates than your initial mortgage. Getting one of these loans is a lot like the process you followed to get your initial mortgage. You can apply through a bank, an online lender, or a credit union like Bellco.
What should home equity loans/LOC be used for?
Because of the quick-turn nature of a typical home equity loan/LOC, you can usually access cash pretty fast, which makes these loans good for emergency expenses like medical bills, unexpected car or home repairs, or bridging a pay gap from a job loss. You could also use the funds for things that will reinvest in the value of the home, like remodeling projects, home enhancements like new windows or a roof, or energy-efficient investments like solar panels or more efficient appliances. Another great use for home equity funds is to consolidate higher-interest debt—with lower interest rates, you can wind up saving a fair amount over the course of the loan.
Common reasons to avoid leveraging your home’s equity
Many financial experts agree that people shouldn’t use their home’s equity on unnecessary personal expenses like luxury items or swimming pools. Also, as long as you haven’t suffered an unexpected job loss, you should be able to budget for your everyday expenses such as groceries and utilities through your income; if you find you regularly need to borrow to pay for those items, you should reexamine your budget and cut any frivolous expenses out.
Next steps with your home’s equity
If you’re considering using your home’s equity, be sure to plan appropriately. Determine how much you can afford to pay each month while still meeting your mortgage payments and hitting your general budget. Remember that overextending yourself with your home could risk losing it to foreclosure, so even if you’re planning to use the funds for something that would increase the value of the home, it might not work for your situation. With that said, if you’re ready to apply for a HELOC, be sure to check out Bellco’s ChoiceLine product*, which offers great rates, a no closing cost option**, and no annual fee*.