If you have a mortgage and want to free up cash to pay for home improvements, remodeling or other investments, taking out a home equity loan, a home equity line of credit (HELOC) or a reverse mortgage are among options to make your home equity work for you. But what is home equity, what can you do with it and how do you tap into it? Keep reading to find out.
What is Home Equity?
Home equity is the portion of your home that you have already paid off. It is calculated by subtracting your outstanding mortgage and loan balances from the current market value of your home. For example, if you put 20% down on a house that is worth $200,000 and take out a mortgage to cover the remaining $160,000, then you would have $40,000 of equity in your home. As you pay off the mortgage, your home equity increases until you own your home in its entirety.
How can I use my Home Equity to access funds?
When you have home equity, you can use that equity as collateral to borrow money in the form of a home equity loan, home equity line of credit (HELOC) or a reverse mortgage. Interest rates on these types of loans tend to be lower than on other types of loans because they are secured by the portion of your home that you own. Choosing an option depends on what you wish to do with the extra cash.
A Home Equity Loan, otherwise known as a second mortgage, is one way to borrow against your home equity and receive all the money in one lump sum at a fixed interest rate. You then make monthly principal and interest payments to pay it off. This type of loan can be useful if you need cash to make a large, one-time payment. A home renovation is a good example. It could also be used to consolidate high-interest debt.
Another option is a home equity line of credit or HELOC. A HELOC also uses your home equity as collateral. However, rather than receiving all your money at once, you get access to a line of credit from which you can withdraw money as you need it. The beauty of a HELOC is that you only pay interest on what you use.
There are two stages of a HELOC. The first is the draw period, during which you can withdraw as much money as you need up to the credit limit. The second is the repayment period, which is when you pay off the debt. Interest rates on HELOCs are usually adjustable, and your monthly payments will vary. A HELOC is a good option if you want to make many smaller improvements to your home over an extended period of time, or if you're not exactly sure how much money you will need.
Lastly, if you are at least 62 years old, a reverse mortgage is another choice to consider. As the name suggests, a reverse mortgage is the opposite of a traditional mortgage. Instead of making payments to a lender to earn equity in your home, the lender makes payments to you. Your debt to the lender increases, and your equity decreases as the lender buys it from you. You remain the title holder of your home, but when you sell it, pass away, or move out for more than a year, the loan becomes due. The lender will then sell the house to recover the funds you borrowed, and any remaining equity falls to you or your heirs.
Reverse mortgages are most commonly used by elderly adults since you need to be at least 62 years old to apply for one. They can be a good alternative when you want to retire but don't have enough savings and assets to do so. If you are considering a reverse mortgage, make sure to do your research, read the fine print and consult an attorney because scams are common.
What is a Home Equity Line of Credit Card?
While there are advantages to each of the options mentioned above, the application and approval process can take a few weeks, and getting access to your funds can be a hassle. Perhaps the easiest and fastest way to access your funds is with a HELOC Card, which is similar to a traditional HELOC, but without the need for a checkbook or online transfers. A HELOC Card works just like a credit card and can be used anywhere credit cards are accepted. There are lenders, like Aven, that specialize in these cards and in speeding up the approval process.
To apply for a HELOC Card, you will need to meet a few requirements like having a stable income, a credit score of around 650 and around 20% equity in your home. Unlike with a traditional HELOC, the entire process can be completed online and doesn’t usually require a home appraisal. All you need to do is answer a few questions about yourself and your home, confirm your income by uploading pay stubs or logging into your bank account and complete an online notarization session to sign paperwork. To learn more about the requirements and steps to getting a HELOC Card as quickly as possible, check out this article.
Which option is right for me?
Deciding which option is best depends on many factors, including what you need the money for and how quickly you need access to it. A home equity loan may be best for well-thought out projects with a known cost, while a HELOC is better for ongoing projects in which the costs are variable. However, if you need your funds quickly and want a convenient way to access them, a HELOC Card may be what you're looking for.
Have you decided a HELOC Card is worth looking into? Aven can get you approved in as little as 15 minutes. Read more and find out if it's for you!