With the housing market going strong and home valuations reaching new highs, now’s a good time to consider tapping into your property’s intrinsic value—your home equity. Your home is one of your most valuable assets, a resource you can use to help finance major expenses that are important to you. And given the current climate, the value of your home may have grown more than you think.
At Flagstar, our main interest is helping you achieve your financial goals, so we want you to understand how and why your home equity can be a valuable resource when you need money for important purchases and obligations.
Home-equity lending and how it works
As you pay off your mortgage and homes increase in value, more funds may be available for your use. For example, if your home’s market value is $250,000 and you owe $100,000, you have $150,000 in equity. Home-equity lending allows you to borrow money against that amount and use the funds in a variety of ways.
There are several types of home equity lending. Here we will discuss a home equity line of credit (HELOC) and a cash-out mortgage.
- A cash-out mortgage is a refinance that allows you to take advantage of the equity you’ve built up in your home by taking some of that cash when the refinance is complete. The cash can go toward virtually any purpose, such as home remodeling, consolidating high-interest debt or other financial goals.
- A home-equity line of credit (HELOC) has a variable rate and offers more flexibility in that it allows you to draw on a line of credit as needed. Your line of credit is based on the difference between your home’s current value and your mortgage balance.
Deciding on which home-equity solution is right for you will depend on your needs and financial situation. A Flagstar loan advisor can help you navigate the details and decide which option is best for you.
Opportunities to tap into your home equity
It’s best to think of a home-equity line of credit (HELOC) or cash-out mortgage as an investment in appreciating assets—an important step to help you improve your financial future and peace of mind. Here are some examples:
Common uses
- Home improvements or renovations: Whether you’re updating a kitchen or adding a new bedroom for a child on the way, upgrades like these add value to your home and will ultimately increase your equity. Oftentimes they end up paying for themselves.
- Debt consolidation: A cash-out mortgage or HELOC allows you to consolidate high-interest debt at a lower rate and save yourself money each month. You can also use home equity to pay off personal debts like car loans or large credit-card bills.
Other uses
- Unexpected emergencies: The ability to borrow against your home equity can be a huge relief when you’re faced with a major illness, job loss or other unforeseen event that turns out to be too expensive for your savings to cover.
- Starting or growing a business: Whether it’s a full-time job or a side project, a home-equity loan can give your new business the necessary capital to get off the ground—or allow you to purchase additional resources to take your company to the next level.
- Retraining: If you’re thinking about changing careers, a home-equity loan may help with the costs of new certification, an executive education program or a new college degree.
- A wedding: With the average cost of a wedding estimated at $20,000 or more (not including the honeymoon), some couples might want to take out a HELOC or cash-out mortgage to cover the big event.
Mistakes to avoid
It’s important to keep in mind that tapping into your home equity isn’t the right option for every major expense. Here are some pitfalls to avoid:
- Investing in depreciating or underperforming assets: Paying for a vacation or purchasing a car is not typically a wise use of your home’s equity. A car starts losing its value the minute you drive it off the lot. And using home equity to pay for a trip or other leisure activities or entertainment can often be an indicator you need to reevaluate your budget or find other financial tools that would be better resources.
- Balancing out cash-flow issues without making other major changes: From time to time, you may need extra cash to cover something unexpected, but if you’re relying on additional cash flow to cover everyday living expenses, then accessing your home equity may not be the right choice. This could lead to losing equity in your home without getting the same value back. If you’re counting on home equity just to get by, you may need to look at budgeting your day-to-day expenses more efficiently or finding other sources of income.
