If you’re a homeowner, you’ve probably seen your home’s value go up a lot recently. In some markets, you might even use the term skyrocket! That’s got some people wondering whether this might be time to put that home equity to work. Here are some questions to ask to help you decide whether now’s the time to cash-in on your home’s equity.
What is home equity?
You have equity in your home when the market value of the property is more than the amount you owe on it. So, when you first bought your home it’s likely the down payment you put on property gave you that amount of equity right away. Over time, as you pay down your mortgage and, ideally, home values rise your equity grows. Bonus tip: the opposite of having home equity is sometimes called being “underwater” or “upside down” – when your mortgage loan(s) amount to more than your home’s value.
What are the options for tapping home equity?
There are three main options: a home equity loan, home equity line of credit (HELOC) or refinancing your current mortgage to get cash out. Each of these makes sense for different people with different financial situations and goals, so you’ll want to explore all of them.
What do you want to do with the money?
One of the most popular reasons for accessing home equity is to get money for home improvements or remodeling. That’s because the interest on a loan for that purpose may be tax-deductible. When you know pretty closely what the project will cost, a home equity loan or cash-out refinance are often good choices. The same would be true if you’re planning to use the money for a dream wedding or trip-of-a-lifetime, though I that case you wouldn’t be able to deduct the interest on the loan.
On the other hand, a HELOC is ideal for people who don’t know ahead of time how much cash they’ll need for a project or just want the peace of mind of being able to access to their home equity to cover unexpected expenses.
What about debt consolidation?
Another super-popular way to put your home equity to work is debt consolidation using a home equity loan or cash-out refinance. This can really help consumers struggling with a significant amount of high-interest debt, because basically you’re trading your high-interest rate loans (think: credit cards) for a home loan with a much lower rate.
To make sure you keep your finances in good shape after the consolidation, be sure to create a realistic budget you can stick with over the long-term and that you’re comfortable with the new monthly payment. Remember, these loans use the home as collateral and there’s potential to lose the home to foreclosure if a borrower doesn’t keep up with their payments.
Are you planning to move soon?
One final tip. As we’ve seen, the real estate market fluctuates, so your home’s value next year may not be the same as it is right now. If you’re planning to move in the near future and want to buy a home in the new area, run the numbers to make sure you won’t need the equity in your current home to come up with the funds you’ll need for a down payment and closing costs on your next place.
Ready to tap your equity?
This information is provided for educational purposes only. All loans subject to credit approval. Restrictions apply. Must meet membership and account opening criteria. Consult a qualified tax professional.