June 28, 2023Unleash the Power of Your Home’s Equity
Do you ever feel trapped by your finances? Maybe you have several big projects, like your home needs new flooring or your AC is on its last legs. Perhaps you opened your mailbox to find unexpected medical bills. All these projects and expenses can add up quickly, especially when they hit at once.
Luckily, if you’re a homeowner, you have a unique and powerful way to manage these costs without draining your savings. A home equity loan allows you to affordably borrow against the equity in your property – providing a slew of financial perks that shouldn’t be ignored.
What is Home Equity?
Home equity is the amount of ownership you have in your home. You can calculate how much equity you have by subtracting the amount you still owe on your property from its current market value.
Home Equity = Market Value of Home – Amount Owed
As a homeowner, you can borrow against a portion of this figure. For example, if your home appraises at $400,000 and you still owe $250,000 on your mortgage, your home equity would be $150,000.
The amount of equity in your home can change regularly. Two common ways this happens are through fluctuations in the real estate market and when you make your monthly payments.
- Market Fluctuations: If the value of your home increases, your equity will follow suit. The opposite will occur if the market declines.
- Mortgage Payments: A portion of your mortgage payment goes toward the principal of your loan or the amount you owe. Every time you make a payment, you’re decreasing your mortgage balance and increasing your home’s equity.
What is a Home Equity Loan?
A home equity loan allows homeowners to tap into their available equity. It’s a secured loan, meaning your house is used as collateral. Because home equity loans are secured and a lower risk for lenders, the interest rates are much lower than other options, such as a personal loan.
There are two types of home equity loans*:
- Home Equity Loan (Fixed): A traditional home equity loan has a fixed interest rate that will never change over the life of your loan. The funds you borrow are dispersed in a lump sum at the time of closing. Generally, this option is best when borrowing funds for a one-time project or event, such as a home remodel, putting in a pool, or paying for a wedding.
- Home Equity Line of Credit (Variable): A home equity line of credit (HELOC)* has variable rates, meaning the rate can fluctuate with the economy. HELOCs act similarly to credit cards in that you’re approved for a specific amount. However, you don’t have to borrow all the funds at once. Instead, you only borrow what you need when you need it. Once you repay the borrowed amount, the funds become available again.
A HELOC provides much greater flexibility than a traditional home equity loan. They’re best utilized when you have several ongoing projects or expenses, or you want a financial lifeline you can tap into over the next several years.
*PEFCU does not offer Home Equity Lines of Credit, only Home Equity Loans.
How Can You Use a Home Equity Loan?
People often assume home equity loans can only be used for home-related expenses like remodels or repairs. One of the greatest perks of these loans is that they can be used for just about anything.
- Home Repairs or Upgrades: Using your home’s equity for remodels or repairs is a great way to increase the value of your home even more.
- Events: Weddings, family reunions, and vacations can be expensive. If you don’t have the cash to pay for these occasions upfront, a home equity loan can provide an affordable opportunity to pay for them over time.
- Debt Consolidation: Save money by using a lower-rate Home Equity Loan to consolidate high-interest credit cards and other short-term loans that are eating away at your budget.
- Higher Education: A college degree is more expensive than ever, and getting a free ride is no easy feat. Rather than your child amassing hefty student loans, consider using your home’s equity to cover, or supplement, the cost.
- Financial Lifeline: A HELOC can serve as the ultimate emergency fund. You typically have up to 10 years to borrow from your HELOC, and you only pay interest on the money you borrow. So, you can open a HELOC today and not pay a dime in interest until you need it down the road. It provides peace of mind knowing you have access to money should the need ever arise.
Considerations Before Tapping into Your Home’s Equity
Home equity loans are powerful financial tools that can benefit homeowners significantly. However, it’s important to note that these loans use your house as collateral. If you cannot make your payments on time, the lender could foreclose on your home to recoup their losses.
While these loans are affordable and provide many financial opportunities, you don’t want to spend the funds recklessly.
We’re Here to Help!
Being a homeowner provides many perks, including the ability to tap into your home’s equity in an affordable manner. When used responsibly, home equity loans can alleviate fiscal stress and supply the funds necessary to cover major projects and unexpected expenses.
If you have questions on home equity loans or would like to determine how much equity you have in your property, we’re here to help. Please stop by any of our convenient branch locations or call 800-226-6673 to speak with a Member Advocate.
Each individual’s financial situation is unique, and readers are encouraged to contact PEFCU when seeking financial advice on the products and services discussed. This article is for educational purposes only; the authors assume no legal responsibility for the completeness or accuracy of the contents.