Home Equity: How to Use It
Home equity is a homeowner's interest in a home. It can increase over time if the property value increases or the mortgage loan balance is paid down.
Putting it another way, home equity is the part of your property that you truly “own.” You're certainly considered to own your home, but if you borrowed money to buy it, your lender also has an interest in it until you pay off the loan.
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 five 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, 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.