Do you know how many ways there are to borrow using the equity in your home? More to the point, how can you find out which borrowing strategy will work best for you based on your specific circumstances? Don’t worry: these questions have answers, and you’ll be able to find them by doing a bit of research. Fortunately, you’ve come to the right place to start.
We’re going to do our best to clarify some of the concepts involved with home equity, so that you can feel empowered to use yours correctly when the time comes. We’ll look at what home equity is, how you can determine the amount of equity in your home, and what you can do with it once you’ve figured out that information. Follow our advice, and you’ll quickly learn how to flex financial muscles you didn’t even know your home was hiding.
What is Home Equity?
To start with, let’s make sure everyone understands what home equity is. You can think of home equity as the amount of your home that’s yours—so if you’ve only just made a down payment (say, $30,000), then that’s the amount of equity in your home. If on the other hand, you’ve paid off 90% of a $500,000 home, then your equity should be $450,000.
We say “should be” because there are a few other factors at work. You normally find your home equity by subtracting any outstanding balances on your home loans from the current market value of your home, which fluctuates over time. Basing equity on current market values means the amount of equity in your home generally goes up when the housing market is doing well, and vice-versa. It’s important to remember this when you’re borrowing against your equity, as it can affect the size of the loan you end up getting.
Borrowing Against Your Home Equity
How do you get money out of the equity in your home? The answer is simple. Because equity represents the amount of your home that you’ve already paid for, you’re able to borrow against it. However, there are a few ways in which to do this, and some of them may be more effective than others depending on where you stand and what your goals are.
The three most common ways to borrow against the equity in your home are by taking out a home equity loan, a home equity line of credit, or a reverse mortgage. Let’s look at each of these options side-by-side so that you can determine which one is right for you:
Home Equity Loans
Home equity loans are a lump sum that you collect at the front end of the process. They last for a specific period, come with a fixed interest rate, and you pay the same amount for them every month until the duration of the loan is over. A home equity loan is a straightforward and manageable way to borrow—unless you find yourself in a situation where you need to borrow more money from the loan.
Home Equity Lines of Credit
Home equity lines of credit offer more flexibility than home equity loans, making them attractive to borrowers whose financial situations carry greater variability. A home equity line of credit works in much the same way as a credit card: a lender will set a certain borrowing limit for the lifetime of the loan. During this time, you can borrow as much as you like up to that limit, pay it off, and borrow against it again.
If you’re looking for a long-term borrowing solution and you meet the criteria, a reverse mortgage may be right for you. Reverse mortgages often require at least one of the participants to meet a certain age, and they can come with closing costs, but according to All Reverse Mortgage Inc., they also offer a distinct advantage over other borrowing strategies. One such advantage is that you don’t have to start making any payments on a reverse mortgage until the home has left the last surviving homeowner’s possession. As such, reverse mortgages can be helpful for seniors who are looking for extra money during retirement.
Each of the above strategies can be useful in different situations, so do your research carefully. The most important things to know are what your home is worth, and what you can afford to commit to before deciding.