In simplest terms, home equity is a homeowner’s most valuable asset. It is the portion of your property that you truly “own”. Because although you’re considered the homeowner, if you borrowed money to purchase the home, your lender has an interest in the property until you pay off the loan. Your equity can be one of your biggest financial tools as a homeowner because you can tap on it later in life and make it an excellent source of funds.
According to the recent Homeowner Equity Insights Report by CoreLogic, U.S. homeowners with mortgages (roughly 63% of all properties) have seen their equity increase by a total of nearly $590 billion since the first quarter of 2019, an increase of 6.5%, year over year. This means that in the first quarter of 2020, the average homeowner gained approximately $9,600 in equity during the past year.
And even with the impact of the COVID-19 pandemic in the latter half of the first quarter of 2020, home prices continued to rise, which added to borrower equity through March. It’s a huge win for many homeowners, especially those who are looking to sell their homes this year.
1. Home equity loan – This is also referred to as a “second mortgage” because the two loans function very similarly. With this loan, you’re borrowing against the equity you’ve built up in your home so the amount that you can borrow may be limited by how much you’ve paid down in your mortgage.
2. Home equity line of credit (HELOC) – This is the most flexible among the three options. With HELOCs, the loan is divided into two distinct pay periods: the draw period and the repayment period.
3. Cash-out refinance – In this kind of refinance, you borrow more than what you owe and receive the difference in funds, which can be used as you see fit.
If you’ve built up equity in your home over the years, there are several ways to use that asset to your advantage:
1. Make home renovations and upgrades.
Just remember that there are some improvement projects that can actually lower your home’s value so be careful before you borrow against your equity with this purpose in mind.
Experts suggest that by setting up a HELOC before you need it, you’ll be able to access your money faster and be able to qualify for one once an emergency arises.
Likewise, because of its lower rates, a debt consolidation loan using your equity may be a more attractive option than paying higher credit card balances. It can save you money to be spent in interest over the life of the balance, depending on your debt and loan scenario. It can help improve your overall financial health as long as you’re being disciplined and not accruing additional debt while paying off the existing balance.
Just remember that the biggest risk of tapping home equity is that your home serves as the loan collateral. This is why experts strongly advise against using it to buy a car or fund any expensive luxury or vacation. But at the end of the day, the smartest way to leverage equity still depends mainly on what you want or need to do with the funds, your credit score, financial situation, and other factors regardless of which option you choose.
