Have a home improvement or renovation project you want to tackle? What about an unexpected medical expense? Perhaps you need to consolidate existing debt?
If you require access to a substantial amount of money, one of the most common options for consumers is to utilize their home equity. Home equity is simply the difference between your homeās appraised value and the outstanding balance on your mortgage. This equity increases as you pay down your mortgage and as property values rise.
In this post, weāll explain how homeowners in Hawaii can access and use their home equity. . Read on to learn more or contact HFS FCU today.
What Is Home Equity?
Home equity is the difference between your homeās appraised value and the remaining balance on your mortgage. You can calculate your home equity using this simple formula:
- Home equity = Home value ā Mortgage balance
Equity builds over time as you pay down your mortgage and as your homeās value increases. Most lenders typically allow you to borrow 80-85% of your homeās equity. However, at HFS FCU, we offer our members the option to borrow up to 100% of their homeās loan-to-value ratio.
In the next section, we will explain how you can access your homeās equity, through options such as Home Equity Lines of Credit (HELOCs,) home equity loans, and cash-out refinancing.
Ways to Access Your Home Equity
The three main ways to access your homeās equity are HELOCs, home equity loans and cash-out refinancing. Read on to learn more about each of these:
Home Equity Line of Credit (HELOC)
A home equity line of credit, (HELOC) is a revolving line of credit secured by the equity in your home. It works similarly to a credit card: you can borrow against your homeās equity as needed and repay it over time.
HELOCs typically have a ādraw periodā that lasts from 5 to 10 years. During this period, you can withdraw funds and are only required to pay interest on the amount borrowed. After the draw period ends, the repayment period begins, which can last from 10 to 20 years. During this time, youāll need to repay both the principal and the interest.
One of the advantages of HELOCs is that you only pay interest on the amount you actually borrow and use.Ā However, itās important to note that they often come with variable interest rates that can fluctuate based on market and economic conditions, potentially increasing your monthly payments.
Home Equity Loan
A home equity loan provides a lump-sum payment, making it ideal for large, immediate expenses. Unlike a Home Equity Line of Credit (HELOC), which allows you to borrow from your available credit over time, a home equity loan gives you a single disbursement. It is best suited for homeowners who know exactly how much they need for a specific expense and prefer consistent monthly payments.
While thereās less flexibility in home equity loans compared to HELOCs, they typically come with fixed interest rates.Ā This means that your monthly payment will remain the same throughout the repayment period.
Cash-Out Refinance
Another option for accessing the equity in your home is a cash-out refinance. This process involves replacing your existing mortgage with a larger one, allowing you to take the difference in cash. While itās a convenient way to access cash, it will likely result in a higher monthly payment on your new mortgage and more total interest over the life of the mortgage loan.Ā This can affect your monthly budget.Ā However, a cash-out refinance may be beneficial if current interest rates are lower than the rates youāre paying on your existing mortgage.
Smart Ways to Use Your Home Equity
There are many ways you can use your home equity. Hereās a look at some of the most common and financially responsible ways to leverage it:
Home Improvements and Renovations
One of the most common ways to use your homeās equity is to perform a home improvement or renovation, such as:
- Kitchen or bathroom updates
- Basement finishing
- Energy-efficient upgrades, like solar water heating
- Home additions
- Adding modifications to the home for aging in place
- Expensive improvements, like roof, siding or window replacements
Home improvements and renovations are effective ways to use home equity as they can increase property values and enhance your quality of life. Additionally, while you should always consult a professional, improvements or renovations made with home equity may be eligible for tax deductions.
Debt Consolidation
Using home equity is also an ideal way to consolidate high-interest debt at more manageable rates. HELOC and home equity interest rates average 7% to 8%, which is significantly lower than the average credit card interest rate of 21% to 22%.
Aside from a lower interest rate, other benefits of using home equity for debt consolidation include:
- You donāt have to manage multiple accounts each month; youāll just need to make one monthly payment.
- Monthly payments tend to be more predictable, especially if you consolidate with a fixed-rate home equity loan.
- You can potentially improve your credit score by lowering your debt-to-credit utilization ratio.
If you do use home equity to pay off debt, itās important to stay disciplined so you donāt accrue more debt that puts you in a similar bind.
Education Expenses
The cost of college is consistently increasing, and while there are several options available to finance tuition, home equity lines of credit (HELOCs) and home equity loans often offer more favorable interest rates than some student loan options. Also, home equity loans can be utilized not only to cover tuition but also to pay for room and board, as well as ongoing education expenses.
Emergency and Unexpected Expenses
Unexpected events can occur, and when they do, covering the costs can be difficult. While you might consider tapping into your retirement funds or using your savings, many people choose to leverage their home equity to cover expenses such as unforeseen medical bills, emergency home repairs, or other unexpected costs.
Uses to Think Twice About
While there are plenty of things you can use home equity for, there are also instances where financial advisors caution you against using it. These are situations that donāt qualify as financial emergencies and donāt add lasting value. Some examples include:
- Vacations
- Weddings
- One-time discretionary expenses
- Investments
Remember that with a home equity loan or HELOC, your home serves as collateral. This underscores the importance of responsible borrowing.
What You Need to Qualify for a HELOC
So what do you need to qualify for a HELOC? Hereās a look:
- Sufficient equity in your home. Shoot for 15-20% equity.
- A good credit score and good credit history.
- Acceptable debt-to-income ratio (try for 30% or less).
- Proof of income and property insurance requirements.
Put Your Homeās Equity to Work with HFS FCU
Are you ready to make the most of your homeās equity? Reach out to HFS FCU today to discover more about our competitive Home Equity Line of Credit (HELOC) offering and our member-focused service model.Ā Let us help you maximize your equity!
Contact HFS FCU today to schedule an appointment at one of our branches or apply online.
FAQs About Home Equity
What is the difference between a HELOC and a home equity loan?
HELOCs offer revolving credit and are similar to credit cards, as you can borrow money as needed during a defined draw period. Home equity loans, conversely, are lump-sum payments that are better suited for one-time, predictable expenses. HELOCs tend to have variable interest rates that fluctuate based on market conditions, while home equity loans have fixed interest rates.
How much equity do I need to qualify for a HELOC?
Most lenders require you to have 15-20% equity in your home to qualify for a HELOC. This means that your total mortgage debt, combined with this new line of credit, cannot exceed 80-85% of your homeās appraised value.
Can I use a HELOC for anything I want?
A Home Equity Line of Credit (HELOC) can be used for almost any purpose since there are no restrictions on how the funds can be spent. Common uses for a HELOC include home renovations and repairs, debt consolidation, and covering emergency expenses.
What happens if I canāt make my HELOC payments?
Failing to make your HELOC (Home Equity Line of Credit) payments can lead to serious penalties, including late fees and even foreclosure on your home. Other potential consequences include having your line of credit frozen, a negative impact on your credit score, and the lender possibly taking legal action to recover any unpaid amounts. If you find yourself unable to make a HELOC payment, itās important to contact your lender as soon as possible. They may be able to help you establish a different repayment plan or explore other options to help you avoid severe penalties.
How long does it take to get approved for a HELOC?
HELOC approval depends on your lender. Some lenders offer approval within a few days, while others may take a few weeks.
Can I pay off my HELOC early without a penalty?
This varies by lender; most offer HELOCs without prepayment fees, but some may charge an early closure fee, which could amount to several hundred dollars.
