Key takeaways:<\/h2>\n\n\n\n- Home equity is <\/strong>the difference between what you owe on your mortgage and what your home is currently worth<\/li>
- Home equity builds as you make regular mortgage payments or the value of your home goes up<\/li>
- Tapping into home equity <\/strong>helps you pay for large life expenses using your home as collateral<\/li>
- Home equity loans usually have a lower interest rate than personal loans<\/li>
- You can access home equity <\/strong>through a home equity line of credit (HELOC), a home equity loan, or a cash-out refinance<\/li>
- The best way to tap into your home equity depends on the kind of expense you plan on using it for<\/li>
- Most people use equity to consolidate debt, for home improvement projects, emergency expenses, business loans, college tuition, and weddings<\/li><\/ul>\n\n\n\n
What is home equity?<\/strong><\/h3>\n\n\n\nHome equity represents your stake in the property. It\u2019s the portion of your home that is \u201cyours\u201d as opposed to the lender\u2019s and is based on how much you’ve paid off and how much your home is worth. Calculate it by taking the appraised value<\/a> of your home and subtracting any outstanding mortgage and loan balances.<\/p>\n\n\n\nHome equity builds over time as you make regular mortgage payments and as your home’s value goes up. Home equity is especially important if you decide to sell your home. The profit you stand to gain by selling your home is your equity minus closing costs and fees.<\/p>\n\n\n\n
Why use home equity?<\/strong><\/h2>\n\n\n\nTapping into home equity<\/a> is beneficial for homeowners who need a predictable and inexpensive way of accessing a large sum of money. Two key benefits of using home equity as opposed to other forms of financing are:<\/p>\n\n\n\n- Lower interest rates<\/strong><\/li><\/ul>\n\n\n\n
Personal loans are usually unsecured and come with high-interest rates. But your home is not unsecured\u2014it\u2019s backed by a mortgage. So most lenders view home equity loans as less risky and offer lower interest rates than on other loans.<\/p>\n\n\n\n
- Tax benefits<\/strong><\/li><\/ul>\n\n\n\n
According to the 2017 Tax Cuts and Jobs Act<\/a>, homeowners can deduct interest on home equity loans or lines of credit up to $750,000 they use the money to \u201cbuy, build, or substantially improve\u201d the home that secures the loans.<\/p>\n\n\n\nHow does home equity work?<\/strong><\/h2>\n\n\n\nFinancial institutions like banks, online lenders, and credit unions all offer home equity loan products. You can apply for them just like to how you first got your mortgage.<\/p>\n\n\n\n
Lenders consider multiple financial factors when providing home equity loans and lines of credit. Here are the most common financial criteria of a home equity loan:<\/p>\n\n\n\n
- credit score of 650<\/li>
- debt-to-income ratio below 43%<\/li>
- 20% stake in the property<\/li><\/ul>\n\n\n\n
Your stake in the property is another way of saying the amount of equity you have in the property. To have 20% equity in the property, the debt you have left to pay off needs to be no more than 80% of the current value. Whichever lender you choose for your home equity loan will send an appraiser to determine the current value. Then they\u2019ll use that information to determine how much equity you have available.\u00a0<\/p>\n\n\n\n
It\u2019s important to keep in mind that lenders will only allow you to borrow a percentage<\/em> of your home\u2019s equity. The exact percentage depends on the lender, but the maximum loan-to-value ratio is around 80-85% of the property\u2019s appraised value.<\/p>\n\n\n\n![\"a](\"https:\/\/www.flyhomes.com\/blog\/wp-content\/uploads\/2022\/05\/pexels-photo-7594221.jpeg\")
Home equity is a tried and true method of getting cash to pay for big expenses, but make sure you can actually pay it back on time or you could lose your home<\/figcaption><\/figure>\n\n\n\nHome equity products<\/strong><\/h2>\n\n\n\nHome Equity Line of Credit (HELOC)<\/strong><\/h3>\n\n\n\nWith a home equity line of credit<\/a> you can borrow however much you need within the designated loan amount and pay back what you use\u2014with interest. HELOCs are the most flexible home equity products because you borrow only what you need as you need it. This is different from home equity loans which come as one lump sum.<\/p>\n\n\n\nEquity lines of credit work in the same way as a credit card, but with lower interest rates. Your monthly payment is based on the amount of credit used as opposed to the total loan amount. A HELOC has two phases:<\/p>\n\n\n\n
- Draw period:<\/strong> The draw period lasts anywhere between 5-10 years. During this time, borrowers can withdraw up to their line of credit and make interest-only payments.<\/li><\/ul>\n\n\n\n
- Repayment period: <\/strong>The repayment period comes immediately after and lasts 10-20 years. This is when the total amount you\u2019ve borrowed becomes a loan to be repaid. During this time you can no longer make any withdrawals.<\/li><\/ul>\n\n\n\n
Home Equity Loan<\/strong><\/h3>\n\n\n\nA home equity loan functions as a second mortgage which you repay over a period of time. A home equity loan usually has a higher interest rate than your first mortgage because it adds financial risk to the mortgage you already have. It is a good option for if you can begin paying down your loan immediately with fixed payments.<\/p>\n\n\n\n
Cash-out Refinance<\/strong><\/h3>\n\n\n\nWhen you use a cash-out refinance, you\u2019ll take out a loan for the new, higher value of your home, then use it to pay off the original mortgage and keep what\u2019s leftover. It doesn\u2019t involve a second loan, but it does come with closing costs. This is because you\u2019ll end up with less equity in your home than you had before. Basically, your equity will start over. This is usually the most convenient option for borrowers who need a lot of cash for an upcoming expense.<\/p>\n\n\n\n
Reasons to tap into home equity<\/strong><\/h2>\n\n\n\n![\"white](\"https:\/\/www.flyhomes.com\/blog\/wp-content\/uploads\/2022\/05\/pexels-photo-2724749.jpeg\")
A lot of homeowners pay for things like kitchen remodels with a home equity loan because it helps the value of their home go up<\/figcaption><\/figure>\n\n\n\nYou can use your home equity loan for just about whatever you want. But there are some things that make more financial sense to pay for with your home equity.<\/p>\n\n\n\n
Home improvements<\/strong><\/h3>\n\n\n\nHome improvements are some of the most popular reasons people use their home equity. In addition to making your home more comfortable and aesthetically pleasing, renovations like a remodel can increase the value of your home.<\/a><\/p>\n\n\n\nAs previously mentioned, there\u2019s an added tax benefit to using a home equity product for your home renovation(s). Tapping into home equity for a large home improvement project, or a series of smaller ones, usually ends up paying for itself in the long run.<\/p>\n\n\n\n
Emergency expenses<\/strong><\/h3>\n\n\n\n
What is home equity?<\/strong><\/h3>\n\n\n\nHome equity represents your stake in the property. It\u2019s the portion of your home that is \u201cyours\u201d as opposed to the lender\u2019s and is based on how much you’ve paid off and how much your home is worth. Calculate it by taking the appraised value<\/a> of your home and subtracting any outstanding mortgage and loan balances.<\/p>\n\n\n\nHome equity builds over time as you make regular mortgage payments and as your home’s value goes up. Home equity is especially important if you decide to sell your home. The profit you stand to gain by selling your home is your equity minus closing costs and fees.<\/p>\n\n\n\n
Why use home equity?<\/strong><\/h2>\n\n\n\nTapping into home equity<\/a> is beneficial for homeowners who need a predictable and inexpensive way of accessing a large sum of money. Two key benefits of using home equity as opposed to other forms of financing are:<\/p>\n\n\n\n- Lower interest rates<\/strong><\/li><\/ul>\n\n\n\n
Personal loans are usually unsecured and come with high-interest rates. But your home is not unsecured\u2014it\u2019s backed by a mortgage. So most lenders view home equity loans as less risky and offer lower interest rates than on other loans.<\/p>\n\n\n\n
- Tax benefits<\/strong><\/li><\/ul>\n\n\n\n
According to the 2017 Tax Cuts and Jobs Act<\/a>, homeowners can deduct interest on home equity loans or lines of credit up to $750,000 they use the money to \u201cbuy, build, or substantially improve\u201d the home that secures the loans.<\/p>\n\n\n\nHow does home equity work?<\/strong><\/h2>\n\n\n\nFinancial institutions like banks, online lenders, and credit unions all offer home equity loan products. You can apply for them just like to how you first got your mortgage.<\/p>\n\n\n\n
Lenders consider multiple financial factors when providing home equity loans and lines of credit. Here are the most common financial criteria of a home equity loan:<\/p>\n\n\n\n
- credit score of 650<\/li>
- debt-to-income ratio below 43%<\/li>
- 20% stake in the property<\/li><\/ul>\n\n\n\n
Your stake in the property is another way of saying the amount of equity you have in the property. To have 20% equity in the property, the debt you have left to pay off needs to be no more than 80% of the current value. Whichever lender you choose for your home equity loan will send an appraiser to determine the current value. Then they\u2019ll use that information to determine how much equity you have available.\u00a0<\/p>\n\n\n\n
It\u2019s important to keep in mind that lenders will only allow you to borrow a percentage<\/em> of your home\u2019s equity. The exact percentage depends on the lender, but the maximum loan-to-value ratio is around 80-85% of the property\u2019s appraised value.<\/p>\n\n\n\nHome equity is a tried and true method of getting cash to pay for big expenses, but make sure you can actually pay it back on time or you could lose your home<\/figcaption><\/figure>\n\n\n\nHome equity products<\/strong><\/h2>\n\n\n\nHome Equity Line of Credit (HELOC)<\/strong><\/h3>\n\n\n\nWith a home equity line of credit<\/a> you can borrow however much you need within the designated loan amount and pay back what you use\u2014with interest. HELOCs are the most flexible home equity products because you borrow only what you need as you need it. This is different from home equity loans which come as one lump sum.<\/p>\n\n\n\nEquity lines of credit work in the same way as a credit card, but with lower interest rates. Your monthly payment is based on the amount of credit used as opposed to the total loan amount. A HELOC has two phases:<\/p>\n\n\n\n
- Draw period:<\/strong> The draw period lasts anywhere between 5-10 years. During this time, borrowers can withdraw up to their line of credit and make interest-only payments.<\/li><\/ul>\n\n\n\n
- Repayment period: <\/strong>The repayment period comes immediately after and lasts 10-20 years. This is when the total amount you\u2019ve borrowed becomes a loan to be repaid. During this time you can no longer make any withdrawals.<\/li><\/ul>\n\n\n\n
Home Equity Loan<\/strong><\/h3>\n\n\n\nA home equity loan functions as a second mortgage which you repay over a period of time. A home equity loan usually has a higher interest rate than your first mortgage because it adds financial risk to the mortgage you already have. It is a good option for if you can begin paying down your loan immediately with fixed payments.<\/p>\n\n\n\n
Cash-out Refinance<\/strong><\/h3>\n\n\n\nWhen you use a cash-out refinance, you\u2019ll take out a loan for the new, higher value of your home, then use it to pay off the original mortgage and keep what\u2019s leftover. It doesn\u2019t involve a second loan, but it does come with closing costs. This is because you\u2019ll end up with less equity in your home than you had before. Basically, your equity will start over. This is usually the most convenient option for borrowers who need a lot of cash for an upcoming expense.<\/p>\n\n\n\n
Reasons to tap into home equity<\/strong><\/h2>\n\n\n\nA lot of homeowners pay for things like kitchen remodels with a home equity loan because it helps the value of their home go up<\/figcaption><\/figure>\n\n\n\nYou can use your home equity loan for just about whatever you want. But there are some things that make more financial sense to pay for with your home equity.<\/p>\n\n\n\n
Home improvements<\/strong><\/h3>\n\n\n\nHome improvements are some of the most popular reasons people use their home equity. In addition to making your home more comfortable and aesthetically pleasing, renovations like a remodel can increase the value of your home.<\/a><\/p>\n\n\n\nAs previously mentioned, there\u2019s an added tax benefit to using a home equity product for your home renovation(s). Tapping into home equity for a large home improvement project, or a series of smaller ones, usually ends up paying for itself in the long run.<\/p>\n\n\n\n
Emergency expenses<\/strong><\/h3>\n\n\n\n
Home equity builds over time as you make regular mortgage payments and as your home’s value goes up. Home equity is especially important if you decide to sell your home. The profit you stand to gain by selling your home is your equity minus closing costs and fees.<\/p>\n\n\n\n
Why use home equity?<\/strong><\/h2>\n\n\n\nTapping into home equity<\/a> is beneficial for homeowners who need a predictable and inexpensive way of accessing a large sum of money. Two key benefits of using home equity as opposed to other forms of financing are:<\/p>\n\n\n\n- Lower interest rates<\/strong><\/li><\/ul>\n\n\n\n
Personal loans are usually unsecured and come with high-interest rates. But your home is not unsecured\u2014it\u2019s backed by a mortgage. So most lenders view home equity loans as less risky and offer lower interest rates than on other loans.<\/p>\n\n\n\n
- Tax benefits<\/strong><\/li><\/ul>\n\n\n\n
According to the 2017 Tax Cuts and Jobs Act<\/a>, homeowners can deduct interest on home equity loans or lines of credit up to $750,000 they use the money to \u201cbuy, build, or substantially improve\u201d the home that secures the loans.<\/p>\n\n\n\nHow does home equity work?<\/strong><\/h2>\n\n\n\nFinancial institutions like banks, online lenders, and credit unions all offer home equity loan products. You can apply for them just like to how you first got your mortgage.<\/p>\n\n\n\n
Lenders consider multiple financial factors when providing home equity loans and lines of credit. Here are the most common financial criteria of a home equity loan:<\/p>\n\n\n\n
- credit score of 650<\/li>
- debt-to-income ratio below 43%<\/li>
- 20% stake in the property<\/li><\/ul>\n\n\n\n
Your stake in the property is another way of saying the amount of equity you have in the property. To have 20% equity in the property, the debt you have left to pay off needs to be no more than 80% of the current value. Whichever lender you choose for your home equity loan will send an appraiser to determine the current value. Then they\u2019ll use that information to determine how much equity you have available.\u00a0<\/p>\n\n\n\n
It\u2019s important to keep in mind that lenders will only allow you to borrow a percentage<\/em> of your home\u2019s equity. The exact percentage depends on the lender, but the maximum loan-to-value ratio is around 80-85% of the property\u2019s appraised value.<\/p>\n\n\n\nHome equity is a tried and true method of getting cash to pay for big expenses, but make sure you can actually pay it back on time or you could lose your home<\/figcaption><\/figure>\n\n\n\nHome equity products<\/strong><\/h2>\n\n\n\nHome Equity Line of Credit (HELOC)<\/strong><\/h3>\n\n\n\nWith a home equity line of credit<\/a> you can borrow however much you need within the designated loan amount and pay back what you use\u2014with interest. HELOCs are the most flexible home equity products because you borrow only what you need as you need it. This is different from home equity loans which come as one lump sum.<\/p>\n\n\n\nEquity lines of credit work in the same way as a credit card, but with lower interest rates. Your monthly payment is based on the amount of credit used as opposed to the total loan amount. A HELOC has two phases:<\/p>\n\n\n\n
- Draw period:<\/strong> The draw period lasts anywhere between 5-10 years. During this time, borrowers can withdraw up to their line of credit and make interest-only payments.<\/li><\/ul>\n\n\n\n
- Repayment period: <\/strong>The repayment period comes immediately after and lasts 10-20 years. This is when the total amount you\u2019ve borrowed becomes a loan to be repaid. During this time you can no longer make any withdrawals.<\/li><\/ul>\n\n\n\n
Home Equity Loan<\/strong><\/h3>\n\n\n\nA home equity loan functions as a second mortgage which you repay over a period of time. A home equity loan usually has a higher interest rate than your first mortgage because it adds financial risk to the mortgage you already have. It is a good option for if you can begin paying down your loan immediately with fixed payments.<\/p>\n\n\n\n
Cash-out Refinance<\/strong><\/h3>\n\n\n\nWhen you use a cash-out refinance, you\u2019ll take out a loan for the new, higher value of your home, then use it to pay off the original mortgage and keep what\u2019s leftover. It doesn\u2019t involve a second loan, but it does come with closing costs. This is because you\u2019ll end up with less equity in your home than you had before. Basically, your equity will start over. This is usually the most convenient option for borrowers who need a lot of cash for an upcoming expense.<\/p>\n\n\n\n
Reasons to tap into home equity<\/strong><\/h2>\n\n\n\nA lot of homeowners pay for things like kitchen remodels with a home equity loan because it helps the value of their home go up<\/figcaption><\/figure>\n\n\n\nYou can use your home equity loan for just about whatever you want. But there are some things that make more financial sense to pay for with your home equity.<\/p>\n\n\n\n
Home improvements<\/strong><\/h3>\n\n\n\nHome improvements are some of the most popular reasons people use their home equity. In addition to making your home more comfortable and aesthetically pleasing, renovations like a remodel can increase the value of your home.<\/a><\/p>\n\n\n\nAs previously mentioned, there\u2019s an added tax benefit to using a home equity product for your home renovation(s). Tapping into home equity for a large home improvement project, or a series of smaller ones, usually ends up paying for itself in the long run.<\/p>\n\n\n\n
Emergency expenses<\/strong><\/h3>\n\n\n\n
- Lower interest rates<\/strong><\/li><\/ul>\n\n\n\n
Personal loans are usually unsecured and come with high-interest rates. But your home is not unsecured\u2014it\u2019s backed by a mortgage. So most lenders view home equity loans as less risky and offer lower interest rates than on other loans.<\/p>\n\n\n\n
- Tax benefits<\/strong><\/li><\/ul>\n\n\n\n
According to the 2017 Tax Cuts and Jobs Act<\/a>, homeowners can deduct interest on home equity loans or lines of credit up to $750,000 they use the money to \u201cbuy, build, or substantially improve\u201d the home that secures the loans.<\/p>\n\n\n\n
How does home equity work?<\/strong><\/h2>\n\n\n\n
Financial institutions like banks, online lenders, and credit unions all offer home equity loan products. You can apply for them just like to how you first got your mortgage.<\/p>\n\n\n\n
Lenders consider multiple financial factors when providing home equity loans and lines of credit. Here are the most common financial criteria of a home equity loan:<\/p>\n\n\n\n
- credit score of 650<\/li>
- debt-to-income ratio below 43%<\/li>
- 20% stake in the property<\/li><\/ul>\n\n\n\n
Your stake in the property is another way of saying the amount of equity you have in the property. To have 20% equity in the property, the debt you have left to pay off needs to be no more than 80% of the current value. Whichever lender you choose for your home equity loan will send an appraiser to determine the current value. Then they\u2019ll use that information to determine how much equity you have available.\u00a0<\/p>\n\n\n\n
It\u2019s important to keep in mind that lenders will only allow you to borrow a percentage<\/em> of your home\u2019s equity. The exact percentage depends on the lender, but the maximum loan-to-value ratio is around 80-85% of the property\u2019s appraised value.<\/p>\n\n\n\n
Home equity is a tried and true method of getting cash to pay for big expenses, but make sure you can actually pay it back on time or you could lose your home<\/figcaption><\/figure>\n\n\n\n Home equity products<\/strong><\/h2>\n\n\n\n
Home Equity Line of Credit (HELOC)<\/strong><\/h3>\n\n\n\n
With a home equity line of credit<\/a> you can borrow however much you need within the designated loan amount and pay back what you use\u2014with interest. HELOCs are the most flexible home equity products because you borrow only what you need as you need it. This is different from home equity loans which come as one lump sum.<\/p>\n\n\n\n
Equity lines of credit work in the same way as a credit card, but with lower interest rates. Your monthly payment is based on the amount of credit used as opposed to the total loan amount. A HELOC has two phases:<\/p>\n\n\n\n
- Draw period:<\/strong> The draw period lasts anywhere between 5-10 years. During this time, borrowers can withdraw up to their line of credit and make interest-only payments.<\/li><\/ul>\n\n\n\n
- Repayment period: <\/strong>The repayment period comes immediately after and lasts 10-20 years. This is when the total amount you\u2019ve borrowed becomes a loan to be repaid. During this time you can no longer make any withdrawals.<\/li><\/ul>\n\n\n\n
Home Equity Loan<\/strong><\/h3>\n\n\n\n
A home equity loan functions as a second mortgage which you repay over a period of time. A home equity loan usually has a higher interest rate than your first mortgage because it adds financial risk to the mortgage you already have. It is a good option for if you can begin paying down your loan immediately with fixed payments.<\/p>\n\n\n\n
Cash-out Refinance<\/strong><\/h3>\n\n\n\n
When you use a cash-out refinance, you\u2019ll take out a loan for the new, higher value of your home, then use it to pay off the original mortgage and keep what\u2019s leftover. It doesn\u2019t involve a second loan, but it does come with closing costs. This is because you\u2019ll end up with less equity in your home than you had before. Basically, your equity will start over. This is usually the most convenient option for borrowers who need a lot of cash for an upcoming expense.<\/p>\n\n\n\n
Reasons to tap into home equity<\/strong><\/h2>\n\n\n\n
A lot of homeowners pay for things like kitchen remodels with a home equity loan because it helps the value of their home go up<\/figcaption><\/figure>\n\n\n\n You can use your home equity loan for just about whatever you want. But there are some things that make more financial sense to pay for with your home equity.<\/p>\n\n\n\n
Home improvements<\/strong><\/h3>\n\n\n\n
Home improvements are some of the most popular reasons people use their home equity. In addition to making your home more comfortable and aesthetically pleasing, renovations like a remodel can increase the value of your home.<\/a><\/p>\n\n\n\n
As previously mentioned, there\u2019s an added tax benefit to using a home equity product for your home renovation(s). Tapping into home equity for a large home improvement project, or a series of smaller ones, usually ends up paying for itself in the long run.<\/p>\n\n\n\n
Emergency expenses<\/strong><\/h3>\n\n\n\n
- Repayment period: <\/strong>The repayment period comes immediately after and lasts 10-20 years. This is when the total amount you\u2019ve borrowed becomes a loan to be repaid. During this time you can no longer make any withdrawals.<\/li><\/ul>\n\n\n\n
- Draw period:<\/strong> The draw period lasts anywhere between 5-10 years. During this time, borrowers can withdraw up to their line of credit and make interest-only payments.<\/li><\/ul>\n\n\n\n
- Tax benefits<\/strong><\/li><\/ul>\n\n\n\n