How to get equity out of your home

Which home equity loan is right for you?

If you’ve got enough equity built up in your home and you’re looking for a way for it to help you tackle some big expenses, the best financing option for you will depend on several factors.

1. Assess your needs: First things first, try to figure out what you actually need this home equity financing for. Are you dreaming of a picturesque backyard deck? Itching to pay off other high-interest debts? Planning to take a well-deserved vacation? Identifying your financial goals and priorities may steer you in the right direction when it comes to picking the perfect option for your unique situation.
2. Crunch the numbers: Find your favorite calculator resource and do some math. Calculate the potential costs, including interest rates, closing costs, and any other fees that may be associated with each option. If you have a loan amount in mind, try using our monthly payment calculator. Compare the total amount you’ll pay over the loan term for each type of loan you’re considering. Don’t hesitate to reach out to lenders for personalized quotes to get the most accurate picture possible.
3. Determine risks involved: Let’s talk about risk. Every financial decision may involve some level of risk, and home equity financing is no different. Consider factors like your future income stability, fluctuations in interest rates, and how comfortable you are with potential changes in your monthly payments. Assessing the risks associated with each loan option may help you make an informed decision that aligns with your risk tolerance.
4. Seek expert advice: Remember that you don’t have to navigate these waters alone. When in doubt, reach out to a trusted financial advisor or mortgage professional. They may help you break down the details, address any concerns, and guide you towards the best choice for your financial future.

Why take equity out of your home?

Home improvements, debt consolidation, and covering education expenses are just a few of the most common reasons why homeowners might want to access a portion of their home equity. Here’s a deeper dive into some of the reasons that you might consider turning your own home equity into cash in your pocket:

1. Home improvements and renovations: Have you ever imagined what your kitchen might look like with shiny new appliances or how your basement could turn into a state-of-the-art entertainment hub? By tapping into your home equity, you may be able to turn those dreams into reality. With funds for a major home improvement project, you might be able to transform your living space into a magazine-worthy paradise and maybe increase the value of your home in the process.
2. Debt consolidation: If it feels like you’re juggling multiple high-interest debt payments and finance charges, guess what? Your home equity could potentially come to the rescue. By taking equity out of your home with a loan, you might be able to consolidate all those bills into a single monthly payment with a low, fixed interest rate.
3. Education expenses: Education can be a key to unlocking a world of opportunities. If you or a loved one is seeking higher education or pursuing advanced degrees, utilizing your home equity might provide the needed funds for tuition, books, or other education-related costs. This might grant you the peace of mind knowing that you’re investing in a brighter future without breaking the bank.
4. Emergency situations: Life can throw unexpected curveballs our way. From medical emergencies to unforeseen home repairs, having quick access to funds may be a lifesaver. By tapping into your home equity, you might be able to establish a safety net to handle those financial surprises with ease.
5. Entrepreneurial ventures: Are you an aspiring business owner with big dreams of launching your own venture? Your home equity might give you the boost you need to get your ideas up and running. It may provide the startup capital or much-needed funds to expand your existing business.

Remember, taking equity out of your home is a serious decision and should be carefully considered. Always think about the potential risks, consult with financial advisors when you have questions, and make sure you can comfortably manage your loan payments.

Advantages of tapping into your home equity

1. Low interest rates: Compared to other types of loans, home equity loans are secured using your home as collateral for the loan. This means that they typically come with lower rates compared to unsecured borrowing options like personal loans or credit cards. Lower interest rates mean you keep more money in your pocket over the life of the loan.
2. Access to funds: With a home equity loan, you can receive a lump sum chunk of money upfront. This may work great if you have a specific financial goal in mind. A cash out refinance works similarly but involves refinancing your existing mortgage and borrowing additional funds from your available home equity that you receive in a lump sum. With a HELOC, you can access funds when you need them during the initial draw period defined by your lender’s terms.
3. Flexible repayment options: Fixed rate and term home equity loans and cash out refinances come with varying term lengths depending on the lender you choose, so you have the opportunity to select a monthly payment that works with your budget. HELOCs work differently due to typically coming with variable interest rates, but they also allow you to pay off your balance to use it again like a credit card. This is the case with the draw period of a HELOC. When that period ends and the HELOC repayment period begins, you can typically expect to make monthly payments on a consistent amount of the principal balance plus variable interest rate charges.
4. Potential tax benefits: In some cases, the interest you pay on a home equity loan may be tax-deductible. This means potential savings come tax season. Make sure to consult with a tax professional to understand how this applies to your situation.

Disadvantages of taking out a home equity loan

1. Collateral risk: A home equity loan uses your home as collateral. This means it might be at risk of foreclosure if you can’t make your minimum monthly payments. While you wouldn’t want to dwell on worst-case scenarios, it’s important you to consider the risk involved and make sure you can comfortably manage the repayment terms.
2. Closing costs & fees: Depending on the lender you choose to work with, there may be additional upfront costs to taking out a home equity loan. Examples of these might include appraisal fees, application fees, origination fees, or other costs required at closing. While these costs shouldn’t discourage you, you may want to factor them into your decision-making process. Research and compare different lenders in your search for a home equity loan – you may find an option with no closing costs or fees on the loan amount you want to take out.
3. Long-term commitment: Home equity loans may take a significant amount of time to pay off – potentially up to 30 years. It’s like being in a long-term relationship with your loan (and your lender). Make sure you’re ready for the commitment and consider your future financial plans.
4. May encourage overspending: Once you have access to your full loan amount, it may be tempting to indulge in spontaneous shopping trips or to treat yourself to something extravagant. But be cautious with your budget – remember that this loan needs to be repaid, and overspending may lead to financial hardships down the road.