If you own a home, it’s probably the most valuable thing you own. Are you utilizing it as much as you can? Are you utilizing it safely? Let’s figure it out.
What Is Home Equity?
Home equity is not the same thing as property value. You could own a property worth a million dollars. But your home equity might only be half a million dollars. Why? Because you might have a mortgage of $500,000.
Home equity is the financial interest you, as a homeowner, have in your property. You can calculate your equity by subtracting any outstanding loan balance from the home's current market value. Equity represents the portion of your home you own outright. Your equity can increase through mortgage payments and property value appreciation. If your home’s value grows after you’ve purchased it, so does your equity.
Why Do You Need To Access Your Home Equity?
You don’t. For many folks, owning a home and steadily paying off a mortgage is a fine financial plan. For others, however, there are benefits to leveraging their home equity. This is typically because they want to take out a loan. This could be to renovate their home, start or invest in their business, or pay for an unexpected situation, such as medical bills.
How To Access Your Home Equity
There are three main ways to responsibly access your home equity. These are:
A Home Equity Loan
A home equity loan is a second mortgage that enables homeowners to borrow against their home equity and receive money in a lump sum. In most cases, borrowers must keep at least 20% equity in their home, meaning their mortgage and home equity loan combined cannot equal more than 80% of the home’s value.
These loans are often fixed-rate loans. It’s important to note, home equity loans don’t replace yourmortgage, so if your mortgage has a low interest rate, you don’t have to change it by refinancing. A typical home equity loan is 20 years long.
Cash-Out Refinancing
Cash-out refinancing enables homeowners to access their home equity through a first mortgage instead of a second mortgage, as a home equity loan does. A cash-out refinance effectively replaces a homeowner’s mortgage.
Like a home equity loan, a homeowner must keep a 20% equity stake in the property, though some lenders allow borrowers to dip below that 20% minimum. In such cases, the lender may require the borrower to pay for private mortgage insurance. Cash-out refinances replace the existing mortgage, so the terms change.
Home Equity Line of Credit (HELOC)
A HELOC is kind of like a credit card; the lender extends a line of credit for an amount based on the equity in the home. The borrower can access those funds as needed, as opposed to receiving a lump-sum payment.
You can use as much or as little of your HELOC as you need. Just as your credit card limit might be $20,000, you may only use it to purchase $500 of goods in a given month. However, unlike a credit card, once you pay off the balance of your HELOC, the loan is over.
What’s Right for You?
To learn more about your home equity options*, contact a Vectra Bank professional today.
*Loans subject to credit approval. Terms and conditions apply. See banker for details. A division of Zions Bancorporation, N.A. Member FDIC. Equal Housing Lender. NMLS #467014
