4 Reasons to Know When to Start Using Home Equity

Know when to start using home equity to consolidate unsecured debt, pay college tuition or renovate your home.

Key takeaways

  • The value of your equity in your home is simply the difference between the home’s value and what you owe on it (any liens and loans, such as your mortgage balance).

  • Common financial instruments that tap into home equity include the home equity loan, the home equity line of credit and the home equity agreement.

  • If considering utilizing home equity, consider your ability to repay the loan (for a home equity line of credit or home equity loan) and expected market conditions that could affect your home’s future value.

One resource you may not have considered when money is tight? Your home. Four reasons can help you figure out when to start using your home’s equity.

Like other assets, you may be able to use the equity you have established in your home to obtain liquid funds. Some homeowners use funds from their home’s equity to perform renovations; others do so to pay for their children’s college tuition, pay off debt or pay for other life purchases.

No matter your need, one thing is clear: Equity that you have established in your home often can be put to productive economic use.

What is home equity?

A home is the greatest asset for most families and individuals. Owning a home enables you to build personal wealth over time, as the home’s value increases, while also providing you a sense of stability and security.

However, most homeowners do not own their properties outright. Instead, a mortgage encumbers the home on which the owner pays a monthly payment. Equity is established once you’ve paid off a portion of the mortgage.

Determine how much of your home’s equity is accessible.

LEARN MORE: 3 smart ways to use home equity | Truist

For example, let’s say you’ve mortgaged your home for $500,000. After a few years in the home, you’ve managed to pay off $100,000. This means that you still owe $400,000 on the mortgage. In the future, your home’s value grows to $550,000. Subtracting what you owe on the mortgage from your home’s value yields $150,000 – the amount of equity you have.

Remember, though, that it’s not guaranteed that your home’s value will increase. Changes in the market and other factors can cause a home’s value to depreciate.

Why use home equity instead of a personal loan?

Personal loans carry high interest rates and relatively high monthly installment payments. These loans also allow you to borrow only a limited amount of funds.

Tapping into your home equity, however, often is possible at lower interest rates. Using home equity also may provide access to a larger amount of money, as it may be possible to access up to 85% of the equity in your home.

When should you start using home equity?

If you’ve established equity in your home, then you may decide to tap into that value for one of the following reasons:

1. Debt consolidation and payoff

Perhaps you carry revolving debt through credit cards, have outstanding installment payments on personal loans or owe medical debt. Credit cards and personal loans may have high interest rates. For medical debt, the provider whom you owe may send the bill to collections, which negatively affects your credit score.

If this is the scenario for you, making your monthly minimum payments may be difficult. However, making only the minimum payments will just continue the debt spiral due to the interest payments. Debt consolidation is an alternative.

Home equity loans (HELs) and home equity lines of credit (HELOCs) often have low interest rates. If you qualify, you may be able to use one of these methods to roll your unsecured debts into one payment with a lower interest rate, and pay off the debt quickly.

A home equity agreement (HEA) provides cash up front in exchange for a share of the equity in your home. Since it’s not a loan, there are no monthly payments and no added debt. You can use the funds from a HEA to pay off debt.

Paying off debt saves you money by eliminating the interest you pay on the debt, and gives you the chance to positively affecting your credit score. After all, your credit utilization (how much of your available credit you actually use) contributes 30% of your credit score.

2. Home improvement

Essentially, you use your home’s value to help increase its future value. For instance, your kitchen or bathrooms may have been trendy when you purchased your home. But by now, that wood paneling and bathroom carpet have probably gone out of style. Using home equity to renovate can increase your home’s value.

If you decide to use a HEL or HELOC for renovations, however, remember to access no more than what is needed. Even though the loan may have low interest, it will have to be repaid.

3. College costs

For many homeowners, the cost of college tuition is daunting. You may have dreams of attending yourself or of putting your children through college. Accessing your home’s equity may prove a financially smart move.

4. In lieu of a personal loan

As mentioned above, personal loans generally carry a much higher interest rate than a HEL or HELOC. Many people tap their home equity instead of a personal loan for:

  • Emergency funds

  • Weddings

  • Business expenses

But unlike using home equity for debt consolidation and elimination, home improvements or college tuition, the above uses have less-direct connections to improving your financial health. Therefore, consider carefully whether home equity is the best choice in these scenarios.

One way to view the home equity you access is as an investment.

How can I access my home’s equity?

In general, a bank or other financial institution can help you access your home’s equity through a range of financial products. The application process usually resembles that of a primary mortgage.

WATCH: 4 Ways to Get Equity Out Of Your Home

Here are ways in which you may tap into your home’s equity:

Home equity loan. Sometimes referred to as a “second mortgage.” It allows you to borrow against your home’s equity, receiving a lump sum that you pay back over time, at a fixed interest rate.

Home equity line of credit. Also a loan, a HELOC functions like a credit card in that it is a revolving line of credit tied to your home’s equity. It also must be repaid in monthly payments, but has a variable interest rate that can change over time.

Home equity agreement. In exchange for a percentage of your home’s future value, you receive cash today with no monthly payment or interest fees. A HEA is not a loan.

What is best for your situation depends on factors including your credit score, annual income and debt-to-income ratio.

Unlock Technologies is ready to help tap into your home’s equity

Whether to tap into your home’s equity is an important decision, and one you should make with a trusted partner. At Unlock, our team specializes in working with homeowners who need access to cash for home projects, debt consolidation and elimination, and other reasons.

Our home equity agreement provides cash now in exchange for a percentage of your home’s future value. But this is not a loan – there are never any interest fees or monthly installment payments.

If you think Unlock can help you, reach out to us today.