What Is a Home Equity Loan, And How Can You Use It
Your home is more than the place you rest your head at night, eat meals, and invite guests. It’s an investment—and an asset. Unlike other purchases, the money you pay towards your mortgage doesn't disappear. From the time you put down your first payment, that cash is put to work building equity in your home. Like depositing money in a savings account, paying money towards your mortgage is building your financial future.
Home equity loans work on this basis. They tap into the equity you’ve built in your home over the years and allow you to access it as cash. Whether you want to pay for a child’s education, renovate your dream kitchen, or purchase a new car, a home equity loan can help you access the funds you’ve already put away in your home.
How much equity do I have?
Equity is calculated by subtracting your remaining mortgage payments from the market value of your house. Every time you make a monthly payment, your equity goes up. It can also naturally increase over time, which is why many consider property such a good investment.
The amount of equity you have will determine how much money you can get in a loan. When it comes to the application process, getting a home equity loan is similar to a mortgage. Lenders will look at many of the same factors for both.
How does it compare to other loans?
Say you are remodeling your kitchen and need help covering the costs. Most commonly, this is done through a personal loan, a credit card, or a home equity loan. The option that works best depends on your situation.
A personal loan is called an unsecured loan, meaning it’s not backed by something of value, like your house or car. For those who qualify, these loans are quick to get and allow access to funds almost immediately. But because they don’t require collateral to secure them, the lender will charge a higher interest rate to compensate for the higher risk. Most personal loans also have a lower borrowing limit and an expectation to pay it back sooner.
Credit cards are a great option in some situations, especially if they offer a 0% interest promotional period, but you need to be careful if the cost for your renovation is high. The money you borrow will usually need to be paid off within a year or two to avoid excessive interest. If the interest rate is too high and you are unable to pay back the loan, you could end up in debt. Because of this, a credit card is only recommended if you find a good deal and are completing a small upgrade that doesn’t require a substantial amount of cash.
Home equity loans, as explained before, are secured loans that draw on the equity you’ve already built into your house. For many people, this will come with more benefits than any other option.
Benefits of a home equity loan:
- Lower interest rate – If you go with another kind of unsecured loan, you won’t get the same low rate you would with a home equity loan. Home equity loans also keep the same rate over the life of the loan, making it easier to budget.
- Easier to qualify – Having your loan secured by your home is beneficial since it poses less risk to a lender.
- Can be tax deductible - If you’re using the funds to renovate your home, you won’t have to worry about taxes on the loan. This alone is a great reason to choose home equity over personal loans or credit cards.
- Funds can be used for anything – Though only home renovations are tax-deductible, the home equity loan funds can be used for anything—a child’s education, a new business venture, or even a wedding.
Home equity is not an asset many people consider when evaluating their finances. You might not have an overflowing savings jar, but your equity could be worth more than you think. To learn more or speak to a representative about your options, check our home equity loan offers here.