When it comes to your long-term money goals, your home can actually be a useful tool. When you have equity in your home, you can leverage it to meet different financial milestones throughout your lifetime. Discover the five things you need to know about borrowing against your home and find out if using home equity to reach a goal makes sense for you.
1. Determining your equity is easy. To find out if your home has equity, subtract outstanding balances from your first or second mortgage loans from your home's market value.
2. You can leverage home equity tools to improve your current home. How long do you plan to stay in your home? Does your home need significant updates (either to increase value or quality of life)? Typically, if you’re planning on staying in your home for seven years or more and want to make significant improvements, a home equity tool might be right for you.
3. There are two options: A home equity line of credit or loan. When you take out a home equity line of credit, you're using the equity of your home as collateral for the credit line. If you have a short-term financial need or are in the market for a new home, a line of credit might be for you. What’s more, with this option you can have flexibility in the payments, such as paying only the interest each month on what you use. Alternatively, home equity loans have a fixed interest rate, term and scheduled monthly payment. A home equity loan may be a more fitting solution if you want a fixed payment with a specific payoff date.
4. You can use home equity to consolidate debt, free up cash or score a better interest rate. Home equity tools aren’t just for home improvements. For many, home equity can be used as a tool to cash in on a lower interest rate (subsequently freeing up cash to help to consolidate debt or plan for the future).
5. Use experts in the field to help you make a decision. Consider connecting with a lender to talk through the possibilities. Just like any loan or credit line, there are risks involved. Fluctuating property values and interest rates always impact home equity tools, so make sure you weigh your options with a lender who understands your financial picture as a whole and can help you make a decision that will still leave room for other important activities like saving and giving.