If getting your finances on solid ground is on your to-do list this year, but you feel like you’ve already tried everything you can, it may be time to rethink your approach. Since the day you bought your home you’ve been building equity and now could be a great time to turn some of that home equity into cash to give yourself financial freedom with help from a home equity loan.1
What is home equity?
Home equity is the difference between your home’s value and what you own on your mortgage. Your down payment helps you purchase some upfront equity. As you pay down your mortgage, your home equity increases; this is what people in the mortgage industry call “appreciation”. When your loan is paid off in full, you will have 100% equity in your home.
How to calculate home equity
To calculate your home equity, you need to subtract how much you still owe on your mortgage from the appraised value of your home. The equation to find your home equity would look like this:
Home Equity = Home Value – Mortgage Balance
Once you have an idea of how much equity you have, a good next step is to consider how you could access your equity. A popular option among homeowners is a home equity loan.
What is a home equity loan?
A home equity loan—a.k.a. a second mortgage— is a type of loan that allows borrowers to use their home as collateral to access a portion of their home equity. When the loan closes, they’ll receive a lump sum payout to use however they want when the loan closes, including to:
- Pay for tuition
- Consolidate high-interest debt
- Finance home renovations
- Cover unexpected expenses
- Take a big vacation
Talk to a Mortgage Expert Today.
How does a home equity loan work?
With home values on the rise, chances are your home is worth more than what you paid for it. Once you’ve built up at least 20% or more equity, a home equity loan works by turning a portion of your available equity into cash while using your home to back the loan. Like any loan, you’ll make monthly payments to repay the loan.
Home equity loans from PrimeLending have a fixed rate which allows you to make predictable payments. Other benefits of a home equity loan may include maintaining your existing mortgage rate and lower monthly payments.
Home equity loan vs. home equity line of credit (HELOC)
Don’t let the names fool you, a home equity loan and home equity line of credit1 are two different financing options. A home equity loan is different from a HELOC because a home equity loan functions like any other home loan while a HELOC is a revolving line of credit. With a home equity loan, you get one lump sum payout and with a HELOC you can withdraw from the credit line as needed.
Home equity loan vs. reverse mortgage2
For homeowners who are age 62 and older, a reverse mortgage may be a viable option to access their equity. A reverse mortgage works by turning your home’s equity into cash, which is paid out in monthly installments or a lump sum. Unlike a home equity loan where you pay the lender, with a reverse mortgage the lender pays you each month. However, the loan will become due when you no longer live in the home as your primary residence.
Your home’s equity amount will depend on your specific loan situation and the housing market in your area. The best way to explore your home equity options is to have a conversation with a PrimeLending mortgage expert who understands your market and can offer you more options.
1All credit decisions for brokered products will be made by a third party. Restrictions and limitations apply.
2These are brokered loan products. Not available in the following states: NY, NC, or HI. All credit decisions for brokered loan products will be made by the third-party lender. Restrictions and limitations apply. You must still live in the home as your primary residence, continue to pay required property taxes, homeowners’ insurance, and maintain the home according to FHA requirements. Failure to meet these requirements can trigger a loan default that may result in foreclosure. As required by FHA, you will be charged an up-front mortgage insurance premium (MIP) at closing and, over the life of the loan, you will be charged an annual MIP based on the loan balance. Your current mortgage, if any, must be paid off using proceeds from your reverse mortgage loan. If your home needs repairs to be eligible for a reverse mortgage loan, you may be able to use the proceeds of the loan to accomplish this. Generally, the money received is not considered income and could be tax free, please consult your tax advisor and appropriate government agencies for any effect on taxes or government benefits. It is strongly advised that you consult with your family and / or trusted financial planner when considering any reverse mortgage loan.
