What Do People Use Home Equity Loans For
With the housing market still doing relatively well, homeowners can find themselves in a cushy position with regard to their home equity if they find themselves in need of a larger sum of money. A home equity loan can be a great way to cover the costs of a larger project or bill, and it can keep the repayment rate low or comparable to what the home mortgage rate is. Many people want to know the difference between home equity loans and home equity lines of credit, and the folks at your neighborhood branch of Rivermark Community Credit Union can answer any questions you have about what people use home equity loans for.
For Starters, What Is Home Equity?
Home equity is the “value” that your house has earned over time, presuming your home has accrued more value or that you’ve invested in the overall state of your house, as you would through renovation projects and upkeep. Let’s say that you bought your house for $300,000 a few years ago, and since then, it has increased in value and is now appraised at $350,000. The difference is $50,000. This is called equity and is something that will allow you to borrow against your home.
You might have medical bills or private school tuition that requires a larger sum upfront, and by having this equity, or value, built into your home, you may be able to apply for a home equity loan that would cover the larger costs you need to pay. This loan is paid out in a one-time sum and, essentially, could be used for anything, though many people prefer to use it for necessary things like home renovations or bills. To figure out what sort of home equity loan you may be eligible for, check out this handy calculator.
Similarly, a home equity line of credit (HELOC) can be accessed over the course of a pre-established time, and you may make draws on the account a portion at a time, instead of receiving the money in a lump sum. Your local credit union representative can help you decide which is best for you and how you want to proceed with the application.
What Can I Do with the Home Equity Loan?
People with a home equity loan can choose to use the funds for myriad projects or payments. For example, one of the most popular reasons to get a home equity loan is to pay for renovations. Whatever the project, having sufficient funds on hand can mean that you don’t have to retrieve money each time a contractor or designer needs to be paid. In renovation projects, whether you’re redoing your kitchen or bathroom or updating your outdoor space, the home equity loan will cover the expenses and bills you acquire. You’ll be able to relax and focus on the project or task at hand when you don’t have to worry about the payment side of things.
Another way people utilize the funds from a home equity loan is to cover the costs of large, unexpected bills, such as emergency surgery or something that isn’t covered by a health insurance plan. Some people need to pay their children’s private school tuition, or some put the money toward college and the expenses that stem from that. Whatever you choose to use your loan for, be sure to stay on top of payments and treat it as you would any loan—making the minimum monthly payment.
How Does a HELOC Differ?
You’re still using the equity that you’ve built up in your home, but this form of loan is a lot more like a credit card. You use the available credit and make the payments later. That said, a home equity line of credit is secured debt (unlike a credit card, which is unsecured), and it’s backed by an asset with value or, said more clearly, your house. So, while you can apply for a lump-sum through a home equity loan, a HELOC is there when you decide to take withdrawals out.
How Will I Know How Much I Can Take Out for My Line of Credit?
Generally, lenders will use a ratio of loan-to-value to configure the amount of your HELOC, which averages around 80 percent. Calculating this rate isn’t difficult when you have just a mortgage. Take a look at the current loan balance and divide it by the current value of the home. For example, a balance of $200,000 for a home that’s being appraised at $400,000 means that the ratio will be valued at 50 percent.
If you’re aiming for a HELOC, you’ll need to consider this number in the balance of the loan. Let’s say you want to take out a $50,000 home equity line of credit. You would have a loan balance that totals $250,000 on a home valued at $400,000. The loan-to-value would be 62.5 percent. In this example, if the lender was willing to allow you to borrow up to the average 80 percent maximum, you would be eligible for a $120,000 line of credit.
It’s important to also factor in that lenders may be interested in looking at your debt-to-income ratio and credit score before determining how much you can be approved for.
Other Ideas on How to Use Your Home Equity Loan
There are a few more ways that you might be able to utilize a home equity loan or HELOC. Some homeowners will opt to use the loan to pay off credit cards or other loans, such as a car or personal loan. If you have debts with high interest rates, you may benefit in the long run by consolidating them by paying them off and having the lower interest rate that’s tied to your home equity loan or HELOC.
Another option, although a bit more cavalier and one that makes sense if all your other ducks are safely in a row, is to use it to knock off some items from your bucket list. Life is short, and in addition to making wise financial choices, it’s important to enjoy and discover with the time you have.