Leaders Credit Union Blog

Tapping into Home Equity: Start Borrowing Against Your Home

Written by LeadersCU | Nov 1, 2024 3:14:35 PM

Your house is not only a place to call home – it's a key financial asset. As you build tappable equity in your home, you create the opportunity to access funds for your financial goals. It can greatly improve your home's value through renovations, consolidating high-interest debts, and furthering your real estate investments.

Borrowing against your home can be a smart choice for many people. However, it's essential to do so carefully and with clear goals. In this blog, we'll explain home equity, its uses, and what you should know before you start borrowing. Then, you'll be ready to make well-informed financial decisions.

Defining Home Equity and How It's Calculated

So, what exactly is home equity? Simply put, it's how much money you would have after selling your home and paying off your mortgage. It demonstrates how much of your home you own right now.

To find out your home equity, take the current market value of your home and subtract your mortgage balance. For example, if the home's value is $300,000 and you still owe $150,000 on your mortgage, your home equity is $150,000.

As you pay down your mortgage or if the value of your home goes up, your home equity increases, giving you a larger amount of money to use in the future.

Reasons to Borrow Against Your Home's Value

Your home's value is a great tool for covering different financial needs. Home equity has the potential to unlock funds at a lower interest rate than other options. Here are some popular ways to use home equity.

Home Improvements and Renovations

One great reason to borrow against your home is to pay for large home renovations. If you've been dreaming of a kitchen remodel, a bathroom addition, or a full home makeover, these upgrades can improve your living space and increase your home's market value.

When you invest in home improvements, you not only make your living space more enjoyable but might also see a better return on investment. Think of home improvements as an intelligent investment in your property and financial situation. If you choose to sell your home later, a well-kept and modern property can draw in better buyer offers.

Debt Consolidation

Carrying high-interest debt, like credit card balances, can hurt your financial well-being. High rates can make you feel stuck, so combining your debts into one loan with a lower interest rate can be helpful. Many people will opt for home equity as a debt consolidation method.

Using your home equity for debt consolidation can help simplify your finances and might save you a significant amount of money on interest payments. Plus, you'll only have one monthly payment by putting your debts into a home equity loan or HELOC.

Investment in Property and Real Estate

When it comes to worthwhile investments, real estate is often considered to be a good choice. That's because it increases in value over time. If you want to grow your investment portfolio, using the equity in your home can provide the money needed to invest in real estate.

You could use your home equity to buy a rental property, which may help you earn passive income and build wealth over time. If this option appeals to you, consider things like market conditions, how you will manage the property, and how much risk you can handle.

Ways to Access Your Home Equity

When you want to use your home equity, you have two main choices: home equity loans and home equity lines of credit (HELOCs). Understanding how each option works can help you decide which is best for your journey as a homeowner.

Home Equity Loans

Home equity loans let you borrow money based on the value of your property. They usually have a fixed rate and come as a lump sum. This loan option is suitable for significant expenses like home improvements or debt consolidation and has predictable monthly payments.

If you choose to go this route, lenders will look at your credit score and the current market value of your home to decide the loan amount you're offered. It's important to talk to a financial advisor to understand home equity loan rates and terms and ensure they align with your financial goals.

Home Equity Lines of Credit (HELOC)

A home equity line of credit (HELOC) lets you borrow money based on the value of your home. HELOCs differ from traditional loans because they work like a revolving line of credit. This means it functions similarly to a credit card, and you can access money up to your credit limit.

In this case, the credit line has a variable rate that can change with market conditions, helping you manage fluctuating expenses. When choosing a HELOC loan, remember to consider both its draw period and the repayment period.

The Pros and Cons of Tapping into Home Equity

Borrowing against your home can have many benefits. You might get tax deductions for interest paid, so it’s a good idea to talk to a tax advisor. It also gives you financial flexibility to handle unexpected expenses. Plus, the interest rates can be lower than other borrowing options.

Still, it's critical to think about the risks, too. Using your home as collateral to borrow funds isn't a decision to be taken lightly. You could face foreclosure if you don’t repay the loan as you promised. So, ensure you understand the terms and conditions before moving forward, and always borrow responsibly.

Typical Lender Requirements

When you want a home equity loan or a HELOC, lenders will thoroughly assess your money situation to determine if you're a trustworthy borrower. Here are the key factors they will consider when you apply:

  • Credit Score: Lenders will want to see that you have a solid credit history. Check your score before applying, pay down any debt that you can ahead of time, and dispute any errors on your report.
  • Proof of Income: You'll need to show that you have a stable source of income. This requires items like pay stubs, bank statements, or similar documents.
  • Debt-to-Income Ratio: Lenders will assess how much debt you have compared to your income. This helps determine how manageable your debt is.
  • Loan-to-Value Ratio: Through LTV, lenders can understand their risk of lending to you based on the amount of equity built up in your house. This helps determine how much you can borrow.

Before you apply, gather all of your important documents. This will help speed up the process.

Borrow Against Your Home with Leaders Credit Union

Borrowing responsibly can help you open up new opportunities and reach your financial goals, and home equity is a great way to get started. We hope this blog clarifies your options and how they might benefit you in your homeownership journey.

If you're considering borrowing against your home, we encourage you to talk with one of our Mortgage Champions. They can help you understand your money situation and how home equity works best for you. To access another great resource for buyers and homeowners, check out our Get Pre-Approved for Mortgage Guide.

Leaders Credit Union is federally insured by the NCUA.