What is Home Equity?
What Is Home Equity?
Buying a home is a huge deal, and you thought when you reached that life milestone and answered all of the confusing mortgage questions you had, nothing else would pop up. Now you’ve owned your home for a few years, and you’re hearing words like “equity,” “HELOC,” and “cash-out refinance,” and you’re feeling kind of lost and back at square one. While these terms may leave you feeling puzzled initially, developing a deeper understanding of the value of your home and how you can tap into your share of wealth will help you in the long run financially.
Let's start with equity.
Building equity is one of the largest benefits of owning your own home, and that’s exactly what it is – the portion of your home that YOU own. Start with the value of your home – let’s say $300,000. You still owe $200,000 on your mortgage. This leaves you with $100,000 of equity in your home. Equity is the value of your home minus the loan balance on your home. You want this number to be positive! A positive number means the home is worth more than you owe, and that means you have funds to work with. Your home is a valuable asset of your net worth.
Next, we'll cover HELOCs.
HELOC stands for Home Equity Line of Credit. This is where you take what we learned about equity and use it as a line of credit towards something. Your lender will allow you to access a certain percentage of your home’s equity as a “line of credit.” A HELOC makes the most sense to be used to raise the value on your home. For example, doing home repairs or upgrades raises the overall value of your home, which in turn raises the amount of equity in your home. Often times, HELOC’s are fixed rate, which allows you to know exactly what you’ll be paying back.
Lastly, we'll cover Cash-Out Refinance.
A Cash-Out Refinance takes your existing mortgage, and basically replaces it with a new one – and you get the cash. From the example above – you owe $200,000 on your mortgage, but have $100,000 built up in equity in your home. You can do a Cash-Out Refinance for $50,000 and your new total owed on your mortgage would be $250,000 – but you would get the $50,000 in cash to be used elsewhere. Just like a HELOC, the best use of a Cash-Out Refinance is to raise the value of your home. Things like home improvements are very commonly done with a Cash-Out Refi. Another common use of Cash-Outs and HELOCs is debt consolidation. Typically, your mortgage loan or line of credit will have a much lower monthly rate than a credit card.
Which one is right for you?
So now, you kind of have the basics on those tricky terms, but it’s time to decide which one is right for you. Should you go with a Fixed Rate Home Equity Line of Credit to consolidate some credit card debt, or do you think you’d prefer to just tack it all onto your mortgage with a Cash-Out Refinance for those home repairs? Whatever you choose, it’s YOUR home and YOUR something. Let Associated Credit Union help you make the right choice. Give us a call at 770.448.8200 or visit our site at acuonline.org/yoursomething to find out more. We’re here to help you understand, and to make the choice that works best for your something.