Ways to Make Home Equity Work for You
December 3, 2023— Resources
Whether you’ve recently purchased a new home for sale in Corpus Christi or you’ve been a long-time homeowner in Texas, one of the key benefits you’ll enjoy is the ability to build home equity. Beyond offering a sense of pride and a secure place to live, your home is also a significant financial asset. As you make mortgage payments and your property appreciates in value, you accumulate home equity. Let’s discuss how to tap into that equity and put it to work.
What Is Home Equity?
Home equity is the calculated difference between your home’s current market value and the remaining balance on your mortgage. As you continue to make mortgage payments and as your property increases in value, your equity naturally grows.
Ways to Utilize Home Equity
1. Home Equity Loan
Also known as a “second mortgage,” a home equity loan allows you to borrow a fixed amount against your home’s equity at a fixed interest rate. This type of loan is commonly used for substantial expenses that require a large sum of money upfront. Because payments are fixed and predictable, budgeting becomes easier. However, your home serves as collateral, meaning failure to make payments could result in foreclosure.
Tip: Home equity loans are best suited for large, one-time expenses such as a substantial home renovation or debt consolidation at a lower interest rate.
2. Home Equity Line of Credit (HELOC)
A HELOC offers a revolving line of credit based on your home’s equity, giving you the flexibility to draw funds as needed during a set “draw period.” The interest rates are generally variable, meaning they can fluctuate over the course of the loan.
Tip: A HELOC is ideal for ongoing or variable expenses, such as multiple home improvement projects or education costs that occur over an extended period.
3. Cash-Out Refinance
In this method, you replace your existing mortgage with a new, larger one and receive the difference in cash. This is particularly advantageous if current interest rates are lower than those of your original mortgage, as it provides the dual benefit of tapping into your equity while securing lower monthly payments.
Tip: A cash-out refinance is often appropriate for those looking to address multiple financial needs simultaneously while benefiting from a lower interest rate.
4. Reverse Mortgage
Available to homeowners 62 or older, a reverse mortgage allows you to convert a portion of your home equity into cash without having to sell your home or make monthly mortgage payments. The loan becomes due when the homeowner sells, moves, or passes away.
Tip: Reverse mortgages are generally considered a last-resort option for income during retirement and should be approached with caution due to their long-term implications.
Your home equity is a valuable financial resource when used wisely. Whether you’re consolidating debt, improving your home, or supplementing your retirement income, understanding how to leverage your home equity can offer various financial benefits. Before taking any steps, consult with a financial advisor to ensure you’re making the best choice for your personal financial situation.
“Home Equity: What It Is, How It Works, and How You Can Use It,” Investopedia, https://www.investopedia.com/terms/h/home_equity.asp
“10 reasons to use home equity,” Bankrate, https://www.bankrate.com/home-equity/reasons-to-use-home-equity/
“Access Your Home Equity with a Cash-Out Refinance,” American Pacific Mortgage, https://www.apmortgage.com/blog/tapping-your-home-equity-with-a-cash-out-refinance
“Reverse Mortgage Guide with Types and Requirements,” Investopedia, https://www.investopedia.com/mortgage/reverse-mortgage/