Owning a home can provide financial resources based on your home equity. The difference between the value of your home and mortgage amounts owed against it is the estimated amount of equity in your home. You can borrow against your equity by taking out an equity loan or line of credit. Building equity protects against declining home prices. As we learned in the great recession, home values change with housing markets and a good "equity cushion" may prevent owing more against your home that it might be worth in tough market conditions. Homeowners aged 62 and above may supplement retirement income by taking out a reverse mortgage that eliminates mortgage payments and draws against home equity.
Home Equity Loan or Line of Credit Provides Cash
Home equity financing allows you to draw against your equity to obtain cash. You can consolidate debt, make home improvements, or really use the proceeds of home equity financing as you wish. You can borrow a home equity loan, which is also called a second mortgage. The Federal Trade Commission explains the difference between equity loans and lines of credit. An equity loan is structured as a loan for a specific amount; it typically carries a fixed interest rate and has equal principal and interest payments. Equity loans provide a lump sum of cash that you can use to pay off bills or finance a one-time project such as installing a new roof or windows in your home.
A home equity line of credit or HELOC provides credit up to the maximum amount established by your HELOC lender. Interest rates for HELOCs are usually adjustable rates as funds may be withdrawn over a period of years called the draw period. After the draw period expires, a HELOC is usually paid in full or refinanced. A HELOC is a good choice for paying for ongoing expenses such as college tuition or major home improvement projects that are paid for as they are completed.
Equity Cushions Against Changing Home Values
Building equity in your home is a great way to protect against swings in home prices. While equity loans and lines of credit are valuable financial resources, you can build wealth and protect your home by allowing equity to grow as your home value grows. If you purchased private mortgage insurance when you bought your home, you can ask your mortgage lender to cancel the mortgage insurance once your home's loan-to-value ratio (LTV) reaches 80 percent, which means that you have a minimum of 20 percent equity in your home. You can estimate your LTV ratio by dividing your mortgage balance by the current value of your home; if the resulting ratio is 80 percent or less, it's a good idea to contact your mortgage company and ask to cancel your PMI coverage. The Consumer Financial Protection Bureau advises that mortgage lenders are required to cancel private mortgage insurance when your loan-to-value ratio reaches 78 percent.
Reverse Mortgages Provide Additional Income for Eligible Homeowners
If you or your spouse is age 62 or more and you owe little or nothing on mortgages against your home, you may qualify for a reverse mortgage. A reverse mortgage provides access to home equity through cash withdrawal options. According to FHA, which insures most reverse mortgages, payout options include a lump sum withdrawal, or you may choose monthly payouts or a combination of a credit line and monthly payouts. Reverse mortgages may carry significant cost, will reduce the value of your estate, and may have other disadvantages, so it's wise to discuss your plans for a reverse mortgage with a professional financial or legal advisor.
When you complete a form through LendingTree, our network of home equity lenders will provide quotes to help get you the money you need, along with information about your available loan options.