How to Use Home Equity

Home equity is the difference between what the home is worth and how much you still owe the mortgage lenders, according to Freddie Mac.

For example, if your house is worth $250,000, but you owe $50,000, then you have $200,000 in equity. As you make your monthly payments, a portion of your payment will go toward growing your principal balance. If the value of your home stays stable, your equity will grow each month.

If you run into a big expense, tapping into your home’s equity might be the financial solution you need.

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Many lenders offer financing solutions using your equity as collateral to secure the loan. The result is that home equity financing creates a second mortgage payment. If you can’t keep up with your second mortgage payments, the lender might seize your home as collateral.

Unfortunately, this means borrowing against your equity comes with the risk of losing your house. But the silver lining is that collateral makes home equity-based loans less risky for lenders, which often leads to lower interest rates than unsecured loans.

Home equity lines of credit (HELOC) and home equity loans (HELoans) are two popular ways to tap into your home equity. Let’s take a closer look at both.

HELOC

A HELOC is a revolving line of credit. It works similarly to a credit card, only with your home as collateral. The lender approves a maximum credit limit, but you can use however much of it you’d like at any time, giving you enormous flexibility.

As you pay down the balance, it becomes available to borrow again. It’s important to note that the amount you will be permitted to borrow will be based on several different factors, including, but limited to:

Accumulated home equity
Current income
Credit score

There is a draw period when you can access your HELOC to borrow money, generally 5-10 years. After that, you enter the repayment period, during which you make payments on the remaining balance. HELOCs generally have a variable interest rate.

HELoan

Like a HELOC, a HELoan allows you to borrow against the value of your home. However, in a HELoan, you borrow a one-time, lump sum amount, usually at a fixed interest rate.

You then make fixed payments for the duration of the agreed repayment term. You should make sure you’re able to make the monthly loan payment before proceeding with a HELoan.

Read more: HELoan: Pros and Cons

What to do with your home equity

When you use your home equity, you have the freedom to spend in various ways. But here are a few popular ways to use your home equity.

Debt consolidation

Debt consolidation involves taking out a loan large enough to cover all your other debts. You can use the home equity funds to pay off these debts and roll the burden into a single monthly payment.

Since a home equity financing solution often comes with lower interest rates, you can save money on interest while simplifying your financial situation. Depending on your debt situation, consolidation through your home equity might even lead to a smaller monthly payment.

Home improvements

As all homeowners know, houses come with an often-never-ending list of projects. If you have major renovation or remodeling projects on your list, your home equity might provide the financing you need.

Many remodeling projects increase the value of your home. With that, undertaking the right projects might increase your equity.

When mapping out a home renovation project, the flexibility of a HELOC is often preferred. Since the cost of a home improvement project can fluctuate, having access to a line of credit can go a long way.

College and educational expenses

The cost of a good education isn’t always affordable. If you want to help your kids pay for college or private school, your home equity might be the right solution.

If considering this choice, take a serious look at your financial situation. Make sure that you can afford to hit your other financial goals, like retirement, before committing to the decision.

Medical bills

Even if you have health insurance, an unexpected illness or injury could result in a costly bill. Unfortunately, medical bills are one of the leading causes of bankruptcy in the U.S.

If you get stuck with a hefty medical bill, it’s tempting to use your home equity to cover the cost. But the right move depends on your situation. Typically, using your home equity is a good idea if you can lock in a lower interest rate than your other payment options.

For example, if your only other payment method is a credit card, then a home equity-based financing solution might be a better solution.

Also, consider negotiating your hospital bills for a better cost before paying the bill.

Dream vacation

While it’s ideal to pay for a dream vacation in cash, a home equity-based loan might offer the lowest interest rates to fund your adventure. If your dream vacation destination is calling your name, using your home equity might be the most affordable way to make your dreams come true.

Weddings and honeymoons

Whether it’s your wedding or your child tying the knot, you could use your home’s equity to pay for a wedding.

Of course, having a sensible party that doesn’t break the bank is likely a sound financial plan, but using the equity you’ve built in your house could be one way to pay for wedding expenses or a memorable honeymoon.

Ready to use your home equity

Understanding how to use home equity can help you tackle a wide range of financial goals and major life expenses. However, before you proceed, calculate which home equity option will work best for you and your overall financial well-being.

Written by Sarah Sharkey

Sarah Sharkey is a personal finance writer who enjoys diving into the details to help readers make savvy financial decisions. She lives in Florida with her husband and dogs. When she’s not writing, she’s outside exploring the coast. You can connect with her on her blog Adventurous Adulting.

IMPORTANT INFORMATION ABOUT PROCEDURES FOR OPENING A NEW ACCOUNT.

To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account.

What this means for you: When you open an account, we will ask for your name, address, date of birth, and other information that will allow us to identify you. We may also ask to see your driver’s license or other identifying documents.

Eligibility for a home equity loan or HELOC up to $500,000 depends on the information provided in the home equity application. Loans above $250,000 require an in-home appraisal and title insurance. For HELOCs borrowers must take an initial draw of $50,000 at closing. Subsequent HELOC draws are prohibited during the first 90 days following closing. After the first 90 days following closing, subsequent HELOC draws must be $1,000 or more (not applicable in Texas).

The time it takes to get cash is measured from the time the Lending Partner receives all documents requested from the applicant and assumes the applicant’s stated income, property and title information provided in the loan application matches the requested documents and any supporting information. Spring EQ borrowers get their cash on average in 26 days. The time period calculation to get cash is based on the first 6 months of 2022 loan fundings, assumes the funds are wired, excludes weekends, and excludes the government-mandated disclosure waiting period. The amount of time it takes to get cash will vary depending on the applicant’s respective financial circumstances and the Lending Partner’s current volume of applications.

Spring EQ cannot use a borrower’s home equity funds to pay (in part or in full) Spring EQ non-homestead debt at account opening. For HELOCs in Texas, the minimum draw amount is $4,000. To access HELOC funds, borrower must request convenience checks.

Interest rates may be adjusted based on factors related to the applicant’s credit profile, income and debt ratios, the presence of existing liens against and the location of the subject property, the occupancy status of the subject property, as well as the initial draw amount taken at the time of closing. Speak to a Prosper Agent for details.

Qualified applicants may borrow up to 95% of their primary home’s value (not applicable in Texas) and up to 90% of the value of a second home. Home equity loan applicants may borrow up to 85% of the value of an investment property (not applicable for HELOCs).

All home equity products are underwritten and issued by Spring EQ, LLC, an Equal Housing Lender. NMLS #1464945.

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