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Reasons to Tap Your Home's Equity
Eric McKinney
/ Categories: Bank, Finance

Reasons to Tap Your Home's Equity

Reasons to Tap Your Home’s Equity

You should always be careful about borrowing against the roof over your head. However, cautiously tapping into your home’s equity can be an excellent way to access quick-cash to pay for renovations or make improvements to your financial situation.

What is Home Equity?

Your home equity is the difference between the value of your home and how much is still owed on your mortgage, essentially the portion of your home that you’ve already paid off. Growing equity is an excellent way to build personal wealth over time, wealth that can be accessed whenever you need it if your finances allow you to borrow.

Your access to your equity is determined by your debt-to-income ratio (DTI), credit score, and other financial factors. A lender will consider these figures, and then will then decide how much of your equity you can access. A DTI of around 36% is a very strong figure for most lenders to OK you to be able to borrow what you need.

Once you’ve gone through the process of getting approved, you can put the equity you’ve built to good use in a variety of ways.

Home Improvements

One of the most common reasons people borrow into their home equity is to make improvements to the house itself. In addition to making the home more comfortable for you and yours, making improvements can raise the value of your property so that if you decide to sell down the road, you can make your built up home equity actually work for you and net you a bigger profit.

Large projects like kitchen or bathroom renovations can enhance your standard of living while also earning you a higher value on your home. “These larger [kitchen] renovations can often pay for themselves by increasing your home’s value over time,”  says Eaton mortgage loan officer Maria Lenz.

Other quality upgrades to consider include building a new deck, refinishing the roof of your home, or adding outdoor features like a patio or new landscaping.

Big Purchases & Education

Need a new vehicle? Or maybe you’re considering something a bit more adventurous. A home equity loan can be a very affordable means of making such a purchase. Rates are typically lower when using your home’s equity versus a specific auto or RV loan.

The pandemic has made many folks reconsider their futures and how they want to spend their time. Going back to school for a career change is great, but can come with a hefty price tag. Home equity loans can be used for education purposes as well.

Debt Consolidation

Consolidating and getting rid of any high interest loans or credit card balances is a very sensible and practical means to pay off debt faster. Consolidating any debt into one home equity loan can make that happen. Just be smart about not taking on additional high interest debt. The key is to eliminate all those high interest payments you may be making. 

Emergency Funds

Most experts agree that most people should have three to sixth months of living expenses saved in an emergency fund in order to be financially protected. However, for most Americans, putting money into such a fund is simply not feasible.

Using your home’s equity in the case of an emergency can be an excellent way to keep yourself afloat. However, this route should only be used if you have a backup plan or know that your financial situation is only temporary. Otherwise, taking out a home equity loan can be a fast-track to accruing serious debt. Therefore, it is absolutely crucial to only use your home’s equity in this way if you have a solid plan in place to repay it.

Business and Personal Expenses

The interest rates on home equity loans can potentially be lower than a loan you might take out for your small business or more personal expenses like a wedding loan. Therefore, if your financial situation allows, a home equity loan can make the difference between having some room for freedom in your finances or having to cut costs to be able to dedicate funds to your business or to your special day.

Long story short, a home equity loan can be used for many different purchases. The key is to borrow smart and ensure your purchases are adding value in the long run.

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