What Is Home Equity and How To Use It to Your Benefit
Have you heard or seen the term “home equity” before and wondered what it really means? You’re not alone. If you’re a homeowner, it’s important to know what home equity is, how to tap into it, and how to use it to your benefit.
Throughout this article, we’ll cover the basics of home equity from start to finish so you can tackle expenses with the help of a home equity product. Let’s get started.
What is home equity?
Simply put, home equity is the amount of your home that you actually own. When it comes to lending, your home equity is commonly expressed in terms of a loan-to-value ratio (LTV). The LTV is the remaining balance on your loan compared to the appraised value of your home.
For example, if you still owe $135,000 on your mortgage and your home currently appraises at $150,000, your LTV would be 90%.
Current Mortgage Balance ÷ Current Appraised Value = LTV
$135,000 ÷ $150,000 = .90 (90%)
As you continue to pay off your mortgage, the amount of your home that you own (your equity), will gradually increase. It can also increase as the market value of your home rises and when you make certain renovations or upgrades.
Curious about how much home equity you can borrow? Most lenders will allow you to borrow up to 80-90% of your home’s value. However, this often depends on factors such as your income, employment history, credit circumstances, and debt-to-income (DTI) ratio.
How can I tap into my home’s equity?
When it comes to borrowing from your home equity, there are three different home equity products you can choose from. It’s important to understand each one so you can choose the option that’s best for you. Here’s an overview of each product:
- Home Equity Loan: This loan option allows you to borrow a specific amount of money, which you receive all at once. It provides a fixed rate, meaning your monthly payment will not change.
- Home Equity Line of Credit (HELOC): A HELOC allows you to borrow money as you need it up to your credit limit. It has a variable rate, meaning it can change throughout your repayment. Use our HELOC calculator to see how much you might qualify for.
- Interest-Only HELOC: The main difference between a regular and an Interest-Only HELOC is that you only need to pay the interest during the draw period. You’ll have to pay back the principal and the remaining interest during the repayment period. Learn more about Interest-Only HELOCs and when it makes sense to use them.
To be considered for a Home Equity Loan or HELOC at Connexus, you must have at least 10% equity in your home. If you meet this requirement, qualified applicants may borrow up to 90% of their home’s value.
Check out this article to learn more about the differences between these home equity products.
What can home equity be used for?
One of the biggest benefits of using a home equity product is that it can cover virtually any expense. Here are some examples of what you can use your home equity for:
- Home repair or renovation
- Unexpected expense
- Debt consolidation
- Medical bills
- Tuition
- Safety net
No matter the expense, a Home Equity Loan or HELOC can help give you the funds you need.
What are the benefits of using a home equity product?
In addition to being flexible, other benefits of home equity products include:
- They can be easier to acquire than traditional loans
- You can often borrow more than you could with unsecured credit
- You can use your home equity to pay off other debts, helping to improve your budget
- Plus, you may be able to take a tax deduction for some of the interest you pay. Consult with your tax advisor for additional information.
How to get started
Now that you know what home equity is and how to use it to your benefit, we can help you get started. If you have questions about which product is best for you, book a call with one of our expert lenders to discuss your options and next steps. You can also quickly and easily apply online for a Connexus Home Equity Loan or HELOC and start tackling those expenses.