Your home is almost certainly your biggest expense. However, it is also almost certainly your biggest asset. This means you can use it to get some other stuff done! Or, to be more precise, you can use the value to borrow money to get stuff done. 👍
There are a number of ways to do it, but we’re going to focus on two of them, the home equity loan and the HELOC (home equity line of credit). If you want to know what they are and when to use which, then read on!
Here are Five Fast Facts on home equity loans vs HELOCs:
- Equity - First, we need to understand equity. This refers to the difference between the amount you owe on the mortgage and the amount the home is worth. So, if your mortgage is $150k and the home is worth $250k, your equity is $100k. If you were to sell your home, you’d pay off the remaining $150k on your loan and then you pocket the rest because you own that portion of the value. Take a screenshot of that bank balance, because you know it ain’t sticking around long!
- Howdy, Home Equity - A home equity loan is just that - a loan. You can get a lump sum based on the amount of equity you have. Most lenders will usually only give you up to 80% of the home’s value, minus the balance of your mortgage. So, using the numbers above, the most you could get would be $80k. You would pay it back over the course of the loan, usually 10-30 years. Plus interest, of course.
- Have A HELOC - With a HELOC you’re still borrowing against the value of your home, but instead of getting a lump sum that you pay back over time, it’s more like a giant credit card. You get a line of credit with a set maximum, and you can borrow up to that limit whenever you need it. Usually, you can take money out for the first 10 years (making only small interest payments), and then you’ll spend the remaining 20 years paying it back.
- What’s It Take? - For both types of loans, you’ll need to have a big chunk of equity in your home. Beyond that, there are usually some other financial requirements like a credit score of at least 650+ and a debt-to-income ratio lower than 44%. The lender needs a warm fuzzy that you’re good for the payback.
- Picking And Choosing - If you know exactly how much you need to borrow, and you’re okay with making payments over a longer period of time, the home equity loan is probably the best. If you don’t know how much you need, or if you need it over a long period of time (like a kid’s time in college), then the HELOC is probably the best.
🔥Bottom line: Regardless of the route you take, make sure you have a solid understanding of the terms of payback. You don’t want any surprises a few years down the road on something like this! Ask lots of questions, and get advice from a trusted friend or a financial advisor.
Do you have experience with either of these?
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