For most people, their home is their biggest asset, and greatest pride. They put effort into choosing the ideal furniture, the perfect art posters, the light fixtures, etc, and keeping it tidy and happy. Equity is not the entire value of your home, but the portion of your home that you actually “own”. The biggest advantage this loan has over personal loans is the interest rate being significantly lower.
Since your home is used as collateral this would be considered a secured loan. The time it takes to get approved can vary and is normally a more involved process than personal loans. Your home must be inspected before the loan can be approved. You will also need to provide all the documentation and paperwork needed. This process can be very lengthy and involved, so having the help of a professional for financial guidance on equity loans can pay off in the long run.
How To Calculate Your Home Equity
You need to know exactly what your home is worth to calculate your home’s equity, many people decide to go to sites like Equity Experts, also found here https://twitter.com/equityexperts, to help talk them through the whole process. But in short, what you paid for your home is probably not an accurate reflection of your home’s current worth. Once you have that amount, subtract the withstanding balance of your mortgage and any other loans related to paying off the entirety of your mortgage. The difference between what you owe and what your home is worth is your total home equity.
Knowing that your home equity is based on its current value, you may want to take steps to increase the value of your home. You can do this through renovations, repairs, increasing your home’s curb appeal, and upgrades Consider asking an appraisal agent to determine the new value of your home. Local banks will sometimes offer help in determining the new value of your home. If you’re Texas based then check your local lone star bank for information on appraising your house..
Different Ways to Use Your Home’s Equity
HELOC (Home Equity Line of Credit)
Using a home equity line of credit is normally used for smaller expenses than a home equity loan. The funds can be utilized as you need them and you can withdraw at any time your line of credit is still open. This is known as the draw period and after that period of time is up you must pay back the loan as well as the interest. You may also be responsible for interest during the draw period.
You can think of the HELOC as a long term credit card agreement. If you have things that you need to pay for over a longer period of time, and not all at once, a HELOC is a better choice for your financial situation. Keep in mind that when the draw period ends and repayment begins, the payments will go up significantly.
Home Equity Loan
There are normally fees and closing costs associated with this loan. The loan term lengths can vary from as short as 5 years to 15 years depending upon your financial situation and needs. A home equity loan is normally at a fixed rate so you don’t have to worry about interest rates skyrocketing. You pull out the entire loan at once and pay back at a monthly rate.
If you need a large sum of money all at once, a home equity loan is a good option for low-interest rates. Since the rates are fixed, a home equity loan lets you know exactly what you will be paying every month until the duration of the loan is complete.
Cash-Out Refinance
When you refinance your home, your home’s equity is used to determine how much you can borrow. You refinance for more than what you owe and receive the difference to use for that remodeling project, tuition funds, or whatever you are needed the financial support for.
Reverse Mortgage
You can use a reverse mortgage to fund your retirement. You do not pay back monthly for this loan. Instead, you use your home’s equity as a form of income for yourself in your retirement years. You can use the extra income to get help around the house with cleaning and yard work or other expenses to help you live more carefree in your retirement years. Choose to get a lump sum upon closing or get installments over the years and spread out the equity over time. When you decide to leave your home the loan is repaid with the profits of selling your home.
Ways to Use Your Home Equity
Use Your Home Equity to Buy Another House
If you are thinking about investing in a rental property or buying that dream vacation home, think about using your home equity to help finance the new home. If you live in a fairly stable real estate market, using your home equity might be the right choice for you.
You can use your current home equity as a loan for a down payment on a new property. This will make your monthly payments on that dreamy Hawaiian getaway beach house cheaper.
Use Your Mortgage Interest Payments for Tax Deductions
To qualify for a tax deduction there are a few steps you must take.
- You must itemize your deductions
on a Form 1040, Schedule A
- You must claim under itemized deductions and not under the standard deduction
- Look into all of the other
deductions you can make under Schedule A
- Make sure your deductions add up to more than the standard deduction
- If you are trying to claim your
home equity debt as a deduction you must prove that you are improving the
property your debt is attached to.
- This only applies to first and second homes, not third or fifth or so on.
Think About Refinancing Your Home
When you begin to look into taking out a loan with your home equity, consider refinancing your loan as well. Refinancing is essential if you haven’t revisited your home loan in a while, or since you originally purchased your home. Rates change frequently and you want to make sure you are getting the best use out of what is most likely your biggest asset.