Fun fact: home equity is considered an asset for homeowners. If this is new news to you, it could be an exciting addition to your total net worth and financial flexibility. In essence, home equity is the total amount that a home has been paid off. The appraised market value of a home minus its outstanding mortgage and loan balance results in a homeowner’s home equity.
How to Access Your Home Equity
There are two different ways to access its value. The first is through a traditional home equity loan. This loan allows you to access the amount of money that has been paid off on your home. The interest rate is fixed, and the repayment term ranges between 5-15 years.
A home equity line of credit or HELOC is the second way to access your home equity. Essentially, you are loaning money from the same source but it acts differently than a traditional home equity loan because the interest fluctuates and it can be paid off in 10-20 years. Additionally, this credit acts as revolving credit instead of a lump sum that needs to be paid off eventually. For example, if HELOC was used toward a minor renovation-once it’s paid off, the credit can be used again for another renovation down the road.
Unique Benefits of Home Equity Loans
There are 2 unique benefits to using either a traditional home equity loan or HELOC. The first is that the interest rates are usually quite lower than other loans. Because they are secured lines of debt based on the value of your home, they are a better bet for lenders when compared to a personal loan or a credit card. The 2017 Tax Cuts and Jobs Act also gives homeowners the opportunity to deduct the interest on the loan when the money is used toward home improvement.
How to Increase Home Equity
If you’re looking for ways to increase your home equity, there are multiple ways to do so that are both active and passive. A couple of options that are up to you include initially making a bigger down payment on your home as well as paying off your mortgage consistently and considering making bigger payments consistently.
Home improvements can also add to your home equity because they will increase the value of your home. Because of this, many financial advisors suggest home renovation as the best way to spend your home equity money. Lastly, your home equity can also increase passively when your property value increases.
What Should I Spend Home Equity On?
As mentioned earlier, the least risky way to spend your home equity is toward home improvements. But because homeowners have the option to use the value of home equity toward anything, there are endless opportunities including debt consolidation, college costs, emergency costs, and the option of protecting your retirement portfolio.
A Word of Caution
Stating the advantages of a home equity loan or HELOC does not go without sharing a necessary word of caution. Because a home equity loan is secured by the home and its value can change due to the market, consider the risks when taking out this type of loan. It is strongly advised not to spend this money flippantly, as it will need to be repaid at some point-similar to any other loan.
Take Advantage
There are multiple remarkable benefits to using your home equity for a loan toward other investments. If you’ve soaked in this new information and have a good idea of how the money can be used to benefit you and your home’s value in the long run, this can be a move in the right direction for you.
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