There is still a lot of home equity that may be accessed nationwide, with the average amount per borrower being close to $300,000. Given that interest rates are still close to 20-year highs, homeowners have an edge when borrowing money.
When interest rates are high, taking advantage of the equity in your home might be a wise move to access cash at a cheaper interest rate than other forms of borrowing.
Why use home equity, and how does it work? Home equity is simply the amount you owe on your mortgage minus the value of your property today.
The equity in your house rises when you pay off a larger portion of your loan as you make mortgage payments over time. It could be beneficial to take equity out of your property to address important life necessities that you don’t have the money to pay for.
A second mortgage is obtained on your home when you borrow money using your home equity. Most lenders require that you have at least 15% to 20% of the equity in your home to borrow against it; this amount often takes a home buyer five to ten years to build up.
There are three ways to access the equity in your home: a home equity loan, a home equity line of credit, HELOC, or a cash-out refinance. You must put your home up as collateral for home equity loans in order to get your second mortgage, so carefully examine the kinds of spending that are worth the risk of foreclosure if you are unable to make payments.
Your Home Equity Matters
The biggest benefit of taking out a home equity loan to pay for renovations is that the interest you pay is tax deductible, which can help you save a lot of money. It can make sense to use a home equity loan to pay off your debt at a lower interest rate, saving you thousands of dollars in interest, if you have credit card debt with a high interest rate that is difficult to pay off.
According to Bank Rate, a sister site of CNET, the interest rates for a HELOC and a home equity loan are now both around 8%. Contrast that with credit card interest rates, which can range from 15% to 29% (a new card’s average rate is 18%). One of the largest expenses that families today face is paying for college tuition.
House equity loans can help by providing upfront funds over a long period of time. If an unpredictable event, such as an unanticipated medical expense, wrecks your finances, one option to explore is a home equity loan.