Home Equity – What Is It and When Should It Be Used
In our last post, we talked about major home improvement projects and how some can have a higher return on investment than others. Today we’ll look at using home equity to pay for such projects.
So what is home equity, anyway? The answer is pretty simple. Home equity is the appraised value of your home minus any outstanding debt still owed from its purchase.
Let’s say your home appraises for $250,000, and you still owe $180,000 on the mortgage(s). Your home equity in this case would be $70,000.
Home equity can come in handy when thinking about a major home improvement project. A home equity loan allows you access to the equity, which you then pay back over time along with your original mortgage. Then the improvement project adds more value to your home, hopefully making up a good portion of the equity you tapped to pay for it. Before taking out a home equity loan though, make sure you’ll be able to handle the additional new monthly payment. Falling behind on a home equity loan is just as hazardous to your ownership and credit score as falling behind on your mortgage would be.
Besides a major renovation though, are there other times when it might make sense to borrow against your home equity? Despite the temptation, the smart answer is usually no.
Let’s look at debt consolidation. You may have multiple bills (student loans, credit cards, etc…) with combined minimum payments that are pretty high. Using a home equity loan to pay off these loans could offer you a lower monthly payment that you currently have. But we all know that unexpected financial challenges can pop up anytime, and the last thing you want to worry about then is an additional debt tied to your home – because now your house is on the line if you default.
To be clear, there may be times when using your home equity for something other than your home makes sense. A Homeownership Advisor can work with you to determine if this might be the case for you and your specific situation.
Best wishes on your continuing homeownership journey!