The past few years have seen a sharp uptick in home values. The combination of historically low interest rates, inventory shortages boosting house prices, and other factors, all have helped create an opportunity for homeowners nationwide. Because, while the value of the average home has soared, the equity in that home has risen along with it.
First, the basics. The difference between the market value of your home and the balance of your mortgage is your home’s equity. If your mortgage constitutes less than 80% of the value of your home, you could harness that equity in your house to finance important life choices, skillfully manage debt, or build wealth. Vikram Gupta, PNC Bank’s Head of Home Equity, talks over the possibilities.
“A lot of people don’t realize it, but there’s all kinds of unharnessed potential in the equity of one’s home. And there are all kinds of good reasons to utilize it.”
When Is Using Your Home’s Equity A Good Idea?
It’s always important to make responsible borrowing decisions. However, there are times when, compared to interest rates on other types of loans, tapping into your home’s equity can make a lot of sense. Some examples?
- Debt Consolidation. If you have considerable credit card debt, using your equity allows you to consolidate credit card balances in favor of a much lower interest rate – empowering you to manage your credit card debt more responsibly.
- School is an investment in the future. Home equity loans sometimes carry lower interest rates than student loans. Work with a financial professional to determine if you should leverage your home’s equity to pay for college tuition and other related expenses.
- Home Renovations. Maybe it’s much needed repairs. Maybe it’s updating your home. Either way, using your home equity may prove a sound way to finance matters.
- Business Startups & Investments. Entrepreneurs looking for that vital start-up capital often can find it in their home.
- Medical Bills. Healthcare is expensive. If health insurance does not fully cover expenses, home equity is often an attractive way to manage the cost of treatments and other health-related expenses.
- Weddings. A special day can be made even more so by ensuring that all wedding expenses can be met.
However, at the same time, Gupta advises prudence, taking time to reflect if tapping into your equity is worth it. “I tell people every day that a house is not a piggy bank. It’s an asset that you can borrow against. So, while it’s responsible to borrow to pay off more expensive debts or achieve goals that serve you for a lifetime, using equity to finance things like a vacation is probably not a good idea.”
What Are Your Options?
There are three distinct ways to tap into your home equity. Each has its advantages and disadvantages.
- With a Home Equity Loan, you receive the borrowed amount (minus any fees and costs) in a single lump sum with a clear repayment schedule.
- With a Home Equity Line of Credit (HELOC), you can access credit on an as-needed basis. Much like a credit card, qualified borrowers are approved for a maximum credit limit and can draw up to that limit.
To learn more about the relative advantages of home equity loans versus HELOCs, and for information to help guide your choices, click here.
- A third option, known as a Cash-Out Refinance, effectively means replacing your current mortgage with a new mortgage of a higher amount—and pocketing the difference.
However, in a high interest-rate environment, a cash-out refinance may not be a wise choice. As Gupta notes, “If you took advantage of the low mortgage rates when you purchased or refinanced your home, it makes very little sense to cash out and refinance a higher mortgage amount if current interest rates are at significantly higher rates.”
What Are The Disadvantages?
Simply put, with any kind of home equity loan, your mortgage is secured by your home as collateral. That means a default on the loan could result in property foreclosure, with the lender seizing possession of your home if you fail to make payments.
What Are My Next Steps?
If you’re considering using your home’s equity, the next step is to decide how much you need to borrow and fully understand how much equity you have. At the same time, it’s important to understand both your credit score and your overall debt-to-income ratio. These help a lender assess your eligibility for a new loan, as well as the interest rates and terms you may be offered.
According to Gupta, applying for a home equity loan or HELOC has become more efficient over time. “Every day it gets easier to apply for a home equity loan, often a matter of applying online. However, if there are questions about the process, or you feel there’s something complicated about your financial situation, it’s always a good idea to talk to a mortgage professional. That way, your questions will be answered, and you can feel more confident about what steps to take next.”
Are conditions ripe for you to take advantage of the home equity boom? Carefully consider your needs to determine if a home equity loan or HELOC makes sense for you.
The property securing the CHELOC must be located in a state where PNC offers home equity products. PNC does not offer the CHELOC product in Alaska, Hawaii, Louisiana, Mississippi, Nevada and South Dakota.