Understanding Your Home Equity Options

If you own a home and are looking for a way to pay for an education, costly home improvements, ongoing medical expenses, debt consolidation or an array of other larger expenses, we may have the right financing solution for you. Taking out a personal loan or using a credit card doesn’t have to be your only option. Did you know that using your home’s equity is often one of the most cost effective ways to pay for some of these bigger expenses? But, before you decide to apply for a home equity loan or home
equity line of credit, it’s important to understand how to figure out how much equity you have, how much you can use and what your options are. Let’s take a moment to look at your home equity options and see which one may be the right solution for you.

Understanding home equity
Calculating your home equity is actually pretty easy. Simply start with the market value of your home as determined by either the sale price or a current appraisal. Then subtract the balance of your mortgage from that price. The amount you get is the equity you have in your home. Also, keep in mind that in most cases you will only be able to borrow 80 percent of that amount.

So, for example, if your home has recently been appraised for $200,000 and you have $140,000 left to pay on your mortgage, you would have $60,000 in equity built in your home. However, because most lenders will only allow you to borrow 80 percent of the appraised value, if you applied for a home equity loan or line of credit under this scenario, you would probably be able to borrow around $20,000.

Your home equity options
Now, say you decide you could really use that $20,000 in equity for your child’s college education or to put a room addition on your house. There are two ways to take advantage of the equity you’ve built in your home. While they are similar, there are a few distinct differences. Here’s what you need to know:

1. Home equity loan – A home equity loan gives you just that – a lump sum loan with a fixed interest rate. That means you’ll receive the total amount of your loan all at once and be expected to pay back the entire amount (with interest) according to your loan terms. This is a great option if you know the specific amount of money you need up front, like with debt consolidation or to pay off a large medical bill.

2. Home equity line of credit – While a home equity loan comes to you all at once, a home equity line of credit gives you an open line of credit at a variable interest rate so you can use your home’s equity as you need it. This is a smart option if you are unsure of the exact amount you may need upfront or you have ongoing expenses to consider. For example, a large home improvement project may necessitate ongoing expenses and bills and additional (and often unexpected) costs may arise. This way, you have the peace of mind in knowing that the money is there when you need it, but don’t have to repay any amount that you don’t use.

Whether you decide that a home equity loan or line of credit is right for you, make sure you get the interest rate and terms you want to help you meet your financial needs. Find a lender you trust and start the process today to utilize the equity you’ve worked hard to build in your home.