Home Equity 101
Becoming a homeowner is one of the biggest investments we make in life. Whether it is your first house or third, the investment you make when buying property goes beyond your mortgage. Over time, the value of your home grows and can become a sizeable asset. Once this equity is built up, it can be converted into a financial resource that increases your buying power for large expenses, like home improvement projects, debt consolidation, college tuition and more.
Home Equity 101
So, how does one go about accessing this asset? A Home Equity Line of Credit (HELOC) is a common way to access the value built in your home. These type of loans are revolving, which means you don’t have to use the full borrowed amount at any given time and any payments you make can then be borrowed again. In function, they are similar to credit cards. However, since your home serves as collateral, these loans can be offered at much lower rates. If debt consolidation, paying for your child’s education, or adding that dream closet to your home are among your financial goals, these lower rates can save you a significant amount of money over the long-term.
What You Need To Know About Variable Rates
Most financial institutions offer Home Equity Lines of Credit with variable rates. Consumers are often apprehensive towards products whose rates can change, but having a better understanding of how variable rates are calculated should make them less scary.
When it comes to calculating variable rates, two factors are commonly considered: the prime rate and margin. Calculated and published by the Wall Street Journal, the Prime Index is used by many financial institutions to set rates for a variety of lending products and is a reflection of a US economy as a whole. Changes to this key index over time represent the variable element in your rate. A certain percentage of ‘margin’ is then added to the prime rate by your lender; however, this margin stays consistent throughout the life of the loan. One of the biggest misconceptions about variable rates is that they will only go up, when in fact, over the life of your loan, they can increase, decrease, or even stay the same.
So How Much Can I Borrow?
If you decide that a home equity loan makes sense for your situation and financial goals, it’s important to know how a financial institution will calculate what you’re eligible to borrow. Your bank or credit union will assess the value of your home, subtract what is still owed on your first mortgage, and then typically allow you to borrow between 70 and 85% of the resulting amount. As you should do when considering any loan product, be sure to factor in the minimum monthly payment, how long you will be making this payment, and how this payment fits your budget, especially if you were to use the full borrowed amount. The lending professional who processes your loan should be able to help you with these calculations.
Becoming a homeowner is a wonderful thing; putting down roots, becoming a part of a neighborhood and community is a foundational part of the American Dream. But it’s also important to recognize, that over time, accessing the equity built up in your home could potentially unlock your long-term financial goals, whatever they might be.