Home Equity: How to Use It

Home Improvement

For some, equity is a word that gets thrown around in the subjects of real estate and home purchasing without a clear idea as to what it is. Equity represents the monetary value that your home has built up from the time you bought it to its current value through things like paying off the mortgage and doing things to improve the health of the house and property - which subsequently improves the value of your home.

How this translates into currency or hard value you can do something with is that the added value versus the balance you owed on it when you bought it creates a line of money that can be borrowed for a number of financial needs, such as home repairs or development on the property outside. For example, if your home now is worth $200,000 and the amount you owed was $150,000, that would mean you could borrow $50,000 against your mortgage, depending on your credit score and history. You don't get this money for free, obviously (though some equity advertising might have you think otherwise), it adds to what you owe on your mortgage and you have to pay it off, but as a way to get a potentially large sum of money for the immediate time, so long as you're confident you can pay it off, it could be a great idea to consider.

The term is usually five to 15 years. These installment loans are paid out in one lump sum, so they’re good for repaying credit card debt or remodeling projects, even buying a new vehicle. A home equity line of credit works like a credit card – you agree to a pre-set limit and then borrow as you need to. A home equity line of credit shouldn’t be used for frivolous luxury items, unless it’s a one-time purchase and not a pattern of behavior. You may have to pay closing costs; discount points; appraisal fees; loan processing fees; document fees; origination fees; funding fees; loan broker fees; and miscellaneous other fees. Make sure there’s a cap on your variable interest rate.

Some equity terms and definitions from https://www.nationwide.com/what-is-home-equity.jsp:

"Collateral

Something of value you offer to guarantee you’ll repay a loan. For a home equity loan or HELOC, your home is used as the collateral. If you default on your payments, the bank could collect on your collateral – foreclosing on your home and taking ownership. So the risk of using your home as collateral is something you should consider when deciding if borrowing against your home’s equity is right for you.

Draw period

The amount of time you have to withdraw funds and make purchases with a HELOC. You may access your HELOC through checks or a credit card. Once the draw period has expired, you may no longer draw on your HELOC.

Fixed interest

An interest rate that doesn’t fluctuate. A home equity loan carries a fixed interest rate, in contrast to a variable interest rate with a HELOC. The fixed interest rate calculation is determined when you apply for the loan, and remains consistent throughout the life of the loan.

Home equity loan

A lump-sum loan that uses your home’s equity as collateral. Also known as a second mortgage loan, a home equity loan is secured with a fixed interest rate and a specific repayment period, so your monthly payments stay constant.

Home equity line of credit (HELOC)

A revolving line of credit that consists of a draw period and a repayment period. The HELOC is similar to a home equity loan in that you use your home’s equity to secure the credit line. In contrast to a lump-sum loan, it’s like a credit card account from which you can draw as needed. Depending on your borrowing needs, having access to a HELOC may be a better solution for you.

Interest rates

The cost of borrowing money. The interest rate applied to your home equity loan or HELOC is determined by a number of factors, which may include how much debt you currently have, your income and your credit score.

Life of the loan

The total time period established by your lender during which you’ll use and repay your loan.

Repayment period

The time after the draw period, when you repay what you’ve borrowed. The repayment period begins when the draw period of a HELOC has expired, or once funds have been disbursed for a home equity loan. During this time, you must make your scheduled payments on your balance.

If you default on your payments, your lender could collect on your collateral – in this case, your home. This is an important thing to remember when choosing your financing options."

Another good source for Home Equity knowledge is here - https://www.uswitch.com/mortgages/guides/equity-and-remortgaging/.