Home Equity: How You Can Use It to Benefit You!
Your home’s equity can be used for many things including home additions, debt consolidation, investment property, or even an extravagant vacation. As a rule of thumb, equity loans are generally made for up to 80% of your home’s equity, and your credit score and income are also considered for qualification. Most loans require upfront costs such as origination fees, titles, credit reports and appraisal fees. You could also see savings on your taxes; based on how you use the funds, the interest paid can be tax-deductible (consult with your tax advisor).
A refinance pays off your current mortgage and gives you cash based on your equity. This is a great way to lower or lock in your mortgage interest rate and get large sums of money – $30,000 or more. You may have to pay closing costs; discount points; appraisal fees; loan processing fees; document fees; origination fees; funding fees; loan broker fees; and miscellaneous other fees.
A home equity loan, a.k.a. a second mortgage, is good for homeowners who don’t need quite as much cash and whose mortgage interest rate is already competitive. The term is usually 5 to 15 years. These installment loans are paid out in one lump sum, so they’re good for repaying credit card debt or remodeling projects, down payment on an investment property, even buying a new vehicle.
A home equity line of credit works like a credit card – you agree to a pre-set limit and then borrow as you need to, or in the event of an emergency, usually for up to 10 years. These are good for debt consolidation, major home improvements, college tuition and expenses, and unexpected expenses. Make sure there’s a cap on your variable interest rate. A home equity line of credit shouldn’t be used for frivolous luxury items, unless it’s a one-time purchase and not a pattern of behavior.