Tapping Into Your Home’s Equity: Top 4 Uses Of Home Equity
Borrowing against your home’s equity can give you the flexibility to access funds when you need them for a large expense like a home remodeling project, wedding or even consolidating debt – and usually at a rate that’s lower than other types of loans or credit cards.
Types of home equity loans
Equity is the difference between what you owe on your mortgage and the value of your home. Both a home equity loan and home equity line of credit use the home as collateral for the loan (second mortgage). The key difference between the two types of loans is how you access the money – as a lump sum or by taking out money against the credit line.
Home Equity Loan
A home equity loan allows you to borrow a fixed amount that you receive in one lump sum. The amount you will qualify for is calculated based on your home’s loan-to value ratio, payment term, your income and your credit history.
Fixed Interest Rates
Most home equity loans have a fixed interest rate.
With a home equity loan, you begin repaying the loan in equal payments after you receive the lump sum for the term of the loan (e.g., 15 years). Also, the interest paid on a home equity loan is often 100% tax deductible.
Home Equity Line of Credit (HELOC)
A home equity line of credit is a revolving credit line that allows you to borrow money as needed to a limit.
HELOCs allow for more flexibility than fixed home equity loans. Since you’re opening a line of credit and not borrowing a set amount, you can withdraw money as needed over the course of a set amount of time known as the “draw period.”
Variable Interest Rates
HELOCs have variable interest rates. This means the interest you’re paying on the loan can fluctuate over the life of the loan. Just like a home equity loan, interest may be tax deductible.
The repayment terms on HELOCs varies, but is usually very flexible. Your lender can explain the details.
Top 4 Uses of Home Equity
- Home improvements. Home renovations can often increase your home’s value and you may be able to deduct the interest paid on the loan from your taxes.
- Debt consolidation. Using a home equity loan to consolidate debt to one low-interest loan can save thousands of dollars and help shorten repayment time.
- College education. With today’s low interest rates, funding a college education with a home equity loan may be a smart choice. However, paying off a federal student loan with home equity might not always be wise, as these loans are sometimes eligible for partial or complete forgiveness.
- Emergency fund. A HELOC can give you access to money to use as an emergency fund if the need arises.
Ready to take out a home equity loan?
Before you apply, it’s important to run the numbers so you are sure you can easily meet the regular loan payments. Otherwise, you risk defaulting on the loan and losing your home.
You should also consult your tax advisor about whether the interest paid on the loan can be deducted from your taxes.
If you're ready to apply, Arizona Federal offers both types of equity loans with low rates and no closing costs! Get started today: Stop by a branch, give us a call at (602) 683-1000 or visit ArizonaFederal.org/Equity.
Your turn: What have you used your home equity's for? Tell us below in the comments.