3 Ways Not to Use Home Equity
One of the biggest perks of homeownership is seeing your home increase in value. Not only does this increase the profit should you decide to sell, but it can also appreciate over time giving you what is called leverage equity when needed
There are a few ways in which you can use home equity to your advantage including borrowing against it to use a large sum of money for other big purchases in life.
What is home equity?
Home equity, in simple terms, is the extra amount of money that your home is worth currently (according to the fair market value) above the amount that you currently owe on your mortgage. So, if your home was worth $500,000 and you paid $300,000 for it and you have $250,000 left to pay on your mortgage loan you would have $250,000 in equity.
The three most common ways to leverage the equity in your home.
Home equity loan
This is given to a homeowner in a lump sum when they take out the loan. Over time the loan is repaid in monthly installments for a set amount of time anywhere from 5 to 30 years and usually comes with a fixed interest rate.
Home equity line of credit
This is a revolving line of credit that can work like a credit card allowing you to make large or important purchases you would otherwise not be able to make. You only need to pay back the money that you spend plus interest on the line of credit and it can be reused as long as you have access. A home equity line of credit usually comes with a variable interest rate but there are some that come with a fixed interest rate.
This is a type of traditional refinance loan that allows the borrower to replace their existing mortgage with a new home loan for more than they currently owe on your mortgage. The extra amount of money borrowed comes to the borrower in a large lump sum of cash to use as they wish.
Three very risky uses of home equity
When you have tapped into your equity and turned it into cash you are able to use this money however you want. But there are some ways that are less wise to spend this equity cash than others. They include:
A large vacation
It can be tempting to get away with that dream experience that you would never be able to afford otherwise. But the best way to take a vacation is to save up for it in cash little by little. You should never take a risk on leveraging your home against a frivolous venture like a vacation.
Covering everyday expenses
Using home equity for this was very tempting over the last several years. If you are finding it difficult to manage day-to-day bills then taking on more debt may not be a solution to the issue. Instead, a safer option would be to contact your lender and request a loan modification. Be honest with them about facing a temporary hardship and ask them what solutions they can offer you so that you both benefit.
Investing in a purchase that will depreciate in value over time
Many people consider using cash from home equity for the purchase of an item such as a brand-new car, or to furnish their home with nice things that they would not be able to afford otherwise. These are useful items, but they depreciate in value over time. It is very risky to leverage your homeownership against something that will not retain its value.
Refinancing or using other ways of tapping into your equity is very enticing right now as interest rates remain low. Just make sure that you are doing it for smart investment purposes as you do not want to get into a risky situation with your homeownership.
For more information on purchasing a home in Granbury Texas and surrounding areas please contact us anytime.
More for Homeowners: