Honing in on Home Equity: Five Fast FAQs

Home equity… you’ve probably heard of it; if you own a home, you may even have some; but, do you really know what it is, how you can use it or what you probably shouldn’t do with home equity?

Today, we’re delving into the world of home equity to answer some of the most-asked equity questions out there. Let’s start at the beginning:

What is home equity?

When it comes to home ownership, equity is the difference between the amount that your home is currently worth and the amount that you still owe on your home. If your home has been appraised for $200,000 and you’ve already paid $50,000, leaving a balance of $150,000, you would have $50,000 of equity in your home.

If your home value increases, so does your equity. On the opposite end of the spectrum, if your home value decreases, so does your home equity.

What do you do with home equity?

Though you may have $50,000 of equity in your home, it’s not money in your pocket, right? So, what can you do with it? Interestingly enough, home equity may not seem like tangible money, but it actually can be… and, rather easily! Once you’ve built up some equity in your home, you can borrow it… or, at least, some of it. Lenders may allow you to borrow various amounts against your home equity, but it is usually safe to assume that you may borrow up to 85% of the equity you’ve earned.

How can you cash in on your home equity?

Basically, there are two ways to utilize your home’s equity. You can either take out a home equity loan or a home equity line of credit. Yes, they sound eerily similar, but these two borrowing options are quite different.

A home equity loan is a lump-sum loan that is typically paid back on a monthly basis over a number of years that is determined by an individual lender. Borrowers usually begin paying on their home equity loans as soon as they receive their lump sum of money. Loan terms may vary, but are often around 15 years.

A home equity line of credit works something like a credit card, where borrowers are able to vary the amount of equity they withdraw at a given time. You can borrow what you need when you need it and pay it back as you use it.

Why would you borrow against your home’s equity?

Many people choose to borrow against their home’s equity to create even more equity! They may want to add on to their home or do some major remodeling. They may choose to upgrade their landscaping or another aspect of their home. Though home renovation projects are common reasons to use equity, they are not the only reasons that people choose to borrow against their home’s equity.

In fact, you could use your home equity for just about any reason. Home equity loans and lines of credit usually offer low interest rates that are unbeatable when compared to conventional credit cards. Some people choose to transfer high-interest credit card balances to lower home equity rates in an effort to pay down debt. Others may use their home equity to pay for their children’s college education. Still others may have another reason to borrow against their home equity.

Why should you be cautious when it comes to home equity?

When you decide to use your home’s equity, you are basically taking out a second mortgage and you are leveraging your home as collateral. On the most basic level, you are running the risk of foreclosure, if something should happen that would prohibit you from paying back your home equity loan or line of credit.

This is why so many homeowners are strongly cautioned about their intentions when it comes to home equity. Using home equity for home renovations, repairs or remodeling often makes sense because this kind of construction actually can add more equity to a home. Using home equity to fund a lavish vacation will do little more than spend money that a person may not really have.

When it comes down to it, utilizing home equity can be an easy way to acquire needed funds in a short amount of time. As long as a person is financially stable, home equity loans and lines of credit are relatively safe ways to use money that has already been put into a home. But, as with any form of credit, there are risks involved with tapping into home equity, too.

This post is sponsored by PA Preferred Mortgage:

Pennsylvania Preferred Mortgage is a full service mortgage banker and is a member of the Prosperity Home Mortgage, LLC family. Specializing in residential and refinance loans, Pennsylvania Preferred Mortgage offers a wide range of mortgage products, including fixed and adjustable rate mortgages, jumbo loans, Federal Housing Administration (FHA) and Veterans Affairs (VA) loans, and renovation financing. Learn more at www.papreferredmortgage.com.