When you buy your home, the lender holds a primary interest in the home and, at this point, you have no equity in your home. Once you begin making your mortgage payments, you’ll reach a point at which the interest on the mortgage has been paid off and you’re starting to pay down the principal. Over time, the lender’s interest will decrease as you pay off a larger percentage of the loan. This gives you equity in your home, but what can you do with it?
Try a Home Equity Loan
This is similar to your initial mortgage and it’s often what people mean when they refer to a second mortgage. You’ll receive a lump sum payment and, in return, you’ll be expected to make monthly payments. You probably won’t qualify for a loan equivalent to the equity in your home, however. Most lenders want you to maintain between 15% to 20% equity in your home, so keep that in mind. This is still a preferable option in that you’ll pay a much lower interest rate than you would pay on credit card debt or personal loans.
Try a HELOC
A HELOC, or a home equity line of credit, is slightly different from a home equity loan, although you can still borrow against the equity in your home. A HELOC differs in the way you obtain the loan and in how it’s repaid. There are two periods connected to a HELOC, which are the draw and repayment periods. During the draw period, you can take money as you need it. As you draw on the available equity in your home, you’ll also be paying small interest payments. Later, you’ll enter the repayment phase. At this point, you’ll no longer be able to borrow and your payments will be larger to include repaying the principal in addition to the interest.
Try a Full Cash-Out Refinancing
There are a few reasons to take this option. It allows you to refinance your existing debt and, if you shop around, you should be able to find more favorable terms. Secondly, you can borrow up to 90% of the equity you have in the home. The money you receive can be used however you choose.
Using the equity in your home can help you improve your financial situation while helping you improve the value of your home, or pay for big-ticket items. On the other hand, you can always let the equity you have in your home continue to build. When an emergency strikes, you’ll be happy to have this resource at your disposal. You may need it to pay medical bills or to recover from a natural disaster, which is why knowing how to use your equity is essential.