You’ve likely heard of home equity and HELOC before, but what does it all really mean and how can you use YOUR home equity to your advantage?
Simply put, home equity is your interest in your home. For example, if you purchased your home for $300,000, paid 20% down, and got a loan for the remaining $240,000, your home equity interest is $60,000. When using your home equity to receive a loan, it’s a good rule of thumb to borrow 80% of the loan-to-value of your home. In the example above, assume after a period of years you still owe $100,000 on your home- reduce the value of your home ($300,000) by 80% or 0.80. Subtract the amount you owe on the home ($100,000), and your new total is what you could be eligible to borrow.
When it comes to using your home equity, you’ll need to decide which type of loan best suits your needs:
- Home equity loans: A traditional lump-sum loan with which you receive all of the money at once and repay it with a flat monthly payment over a set period of time. You’ll have to pay interest on the full amount of the loan. These types of loans are a good choice if you are consolidating high-interest debts or opting for a full home renovation.
- HELOC (Home equity line of credit): With Valley’s HELOC, your payment will be 1-1.5% of the amount you have borrowed or $100, whichever is greater from the time of the last advance. With a HELOC, you can choose to advance on the loan any time during the draw period (Valley’s is 10 years) and how much you want to borrow within the limit. After your HELOC is closed and funded, you can begin to make withdrawals. HELOCs are a great choice for minor home renovations or college tuition payments.
Once you determine what makes the most sense for your situation, it’s important to know what you can use that money for. Many choose to use it for home improvements that will add value to their home. Great examples of home improvement projects that will return a profit include landscaping, minor bathroom and kitchen remodels, and window and garage door replacements. Others choose to use their home equity in the case of an emergency such as job loss or a hefty medical bill, to pay off high-interest debt, or to help with college tuition.
While there are plenty of reasons why you might be considering taking out a home equity loan or using a HELOC, know that using your home equity for vacation homes, luxury items, and lavish vacations are not wise. Generally if it doesn’t add value to your home, help you pay off any current debts, or puts you further into debt that you are unable to pay back, chances are it won’t help you in the long run.
If you’re considering a remodeling project, stop by our booth (#137) at this year’s Spring Home Improvement Show from March 1-3. You can apply for a HELOC at our booth, and learn more about how it can help you this year!
Understanding home equity loans and HELOCs on your own can be tricky, but it doesn’t have to be! If you have questions or are interested in learning how you can use your home equity this year, give us a call or stop in to visit with one of our friendly and professional lenders today!