Home equity if the difference between what your house is worth and how much you have remaining on your mortgage or any other loans tied to your home. You don't have to sell your home in order to leverage the value you have accumulated in your home. Lenders have set up special types of loans that are designed to allow you to use the equity in your home, without having to sell it. Let's review some of the home equity tools available below.
Home Equity Loan
A home equity loan is very similar to a second mortgage. The lender will give you a lump sum at a fixed interest rate that is locked in when you sign for the loan. Much like a traditional mortgage, you will be expected to pay back the loan in fixed monthly payments over a specified period of time, typically 10 - 15 years. In exchange for the lump sum, this loan is generally registered on the title of your home. If you were to sell the house, the lender would collect all that you owe them prior to you receiving a cent.
Home Equity Line of Credit (HELOC)
A home equity line of credit doesn't not involve one large lump sum. Instead, a HELOC functions like a credit card that is using your home as collateral. When you set up a line of credit, the lender will determine the maximum amount you can borrow - just like the maximum limit on a credit card. The amount a lender will give you depends on your home's appraised value, the amount you still owe on the mortgage, your credit history, debt load, and income. Once a HELOC is set up, you can withdraw funds from it as needed.
Note: Keep in mind that is always risk associated with any loans, especially loans that are secured with your home. It would be wise to speak with a financial advisor or other trusted professional prior to making any decisions regarding home equity loans or home equity lines of credit.
REVIEW
Regardless of the home equity tool that you are considering, only leverage the equity in your home if you have the discipline to use the funds for a dedicated purpose, you're spending the money on something of vital importance, and you can repay on time. Tapping into home equity can be a useful strategy for accomplishing your goals.
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