Looking for an easy and quick way to get your hands on some serious cash? Whether you need to improve your financial picture or pay for renovations, you might be looking to cap into your home’s equity. However, this is serious business and you should always be cautious. Remember to do all of the necessary due diligence and look for a reliable lending company.
Common reasons why people need to access their home’s equity include college costs, home improvements, and even emergency expenses. Before we discuss these reasons in a little more detail, we will briefly discuss what home equity loans are and how they work.
What Is Home Equity?
It is important to understand what home equity is. It is the part of your house that you’ve paid off. Home equity refers to the difference between the worth of your house and how much is still owed on your mortgage.
A lot of people see home equity as an easy way to come up with personal wealth over time. The equity from homeownership grows when the value of your house increases over a long period of time and you pay down the principal on the mortgage.
Experts and analysts in the world of finance see “home equity” is a time-tested way to build wealth. It is worth noting that those who know about home equity see it as a better option than credit cards or personal loans with high-interest rates. And it is true home equity loans represent a more cost-effective approach for huge expenses.
How Do Home Equity Loans Work?
Home equity loans have become a very common way of accessing the equity in your homes. The process of tapping into your home’s equity can be very similar to the processes that you have to go through when you have to obtain a mortgage.
You could apply for a home equity loan through a bank, online lender, credit union, or some kind of financial institution that offers such loans. But remember, the easiest and most convenient way is through a trusted lending company for home equity loans.
Regardless of who the lenders are, they will consider a number of different factors, including a person’s debt-to-income ratio, credit score, annual income, and the loan-to-value ratio. For the purposes of determining the amount of equity in a home, the lenders will appoint an appraiser to find out what the current market value of the home is, which will be based on the condition of the house and the value of other properties nearby.
We have discussed why tapping into your home equity can be a convenient, low-cost way to borrow a good amount of money at reasonable interest rates. However, it will all come down to what your needs are and what you plan to use the money for. Let’s look at some of the best ways of using home equity loans.
Home Improvements or Renovations
In recent years, this has become one of the most common reasons why homeowners take out home equity loans. Home improvements or renovations will not only make your home more comfortable for you, upgrading your home could mean that the value of the house will rise and the property could draw the attention of potential buyers if you decide to sell it at a later point in time.
It seems like many homeowners believe that renovations will pay for these loans themselves by increasing the value of the home.
Yet another reason to consider a home equity loan for renovations is that if you can use the loan amount to build, buy or significantly improve the home that has secured the loan for you, you could also deduct the interest paid on home equity loans of up to $750,000.
Business Expenses
We have seen how small business owners can grow their businesses if they can get the right kind of investment. As such, many business owners want to get a home equity loan in order to help grow their businesses.
The kind of business one has can play an important part. However, in almost all cases, if the business requires more capital to grow, business owners could save money on interest by taking out a home equity loan instead of taking out business loans with much higher interest rates.
However, any business owner should run the numbers on their business before they decide to get a home equity loan. Using a home equity loan to invest and cover costs does not guarantee a return on any investment in a business.
If you feel like your business can promise returns, a home equity loan might be just the right thing for you. On the other hand, if the plan fails, you will still be required to make payments on what you borrow, regardless of what you are earning.
Debt Consolidation
Every so often homeowners take out home equity loans to pay off personal debts, such as credit cards or car loans. This is another very popular use of home equity loans, as the loan could be used to consolidate high-interest debt at a lower interest rate. You could use your monthly expenses significantly with a much lower rate over a longer-term.
While this can make things a lot easier for you, it is important to note that you will be turning an unsecured debt (not backed by any collateral) into a secured debt, which will now be backed by your home. You risk losing your house if you default on your loan. On the other hand, if you fail to make credit card payments, you won’t lose anything (except maybe your credit score).
It should be clear now that a substantially lower interest rate and saving money each month is not always the safest way for everyone.