How Can I Use My Home’s Equity?

Home equity is the actual financial amount of the home you own, so it can be used like the returns on any other investment. Because it’s not as accessible as your checking account and you worked hard accruing it, it’s best to limit its use to home improvements, removing private mortgage insurance, a down payment on a second home, college tuition or emergencies.

Below, we’ll explore how to build home equity, how you can access it—whether that’s a line of credit, loan or refinance—and how you can use it.

Home equity is the assessed market value of your home minus how much you owe on your mortgage. In other words, it’s the portion of your home that you’ve actually paid for and own. Purchasing a home with a down payment? That’s likely the only equity you have in your home so far.

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Each time you pay your mortgage, your balance is reduced, and your equity grows.

If your property value goes up, so does your home equity. There are a couple of ways this happens:

• You renovate your home, contributing to how much your home is worth.
• There’s more demand than supply in the housing market. This has less to do with your efforts and more about the economy. If there’s an inventory shortage and a demand for housing, or if your neighborhood is developing, home values will generally go up.

There are a variety of reasons you may want to take advantage of your home equity. Here’s just a few.

• Home improvements: Updates can be financed with your home’s equity. In fact, if they increase your home’s value, they practically pay the home equity you borrowed back. You could also itemize your tax deductions to deduct the interest.
• Remove mortgage insurance: While only eligible for mortgages with Conventional loans which require mortgage insurance if you put less than 20% down, you can remove your mortgage insurance if you increase your home equity by at least 20%.
• Down Payment: If you’re planning to buy a new or second home, you may use the equity you earned in your first home towards a down payment on another.
• Tuition and education costs: Using home equity may be a good avenue if home equity rates are lower than private student loan rates.
• Debt consolidation: High-interest credit card debt could be consolidated into your mortgage at a much lower rate over a longer term, reducing your monthly expenses.
• Accidents, emergencies or medical expenses: As long as you have a plan to pay it off, rest assured you can utilize your home equity to stay afloat.

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HELOCs, HELOANs, cash-out refinancing and Flex Payment Mortgages are a few avenues to accessing your home’s equity. The best one for you depends on your financial situation, how much money you need and what you’re using it for.

It’s best to avoid using your home equity for discretionary purposes.

• Expensive vacations
• Wedding planning
• Non-emergency vehicle purchases

You may end up paying more than the trip was worth over time with interest. If you’re unable to pay it off, you could lose your home to foreclosure. Plus, vehicles depreciate over time—without a significant return, it’s hard to justify using your home equity. Unless it’s an emergency, stay on the safer side.

This article was originally published in www.guildmortgage.com