Your home is likely one of the biggest investments you’ll ever make. If you put money into it, buy in the right neighborhood, and if the economy booms around you, the value of your property should go up. Well, that’s the goal anyway—and due to recent events, your home’s value has likely risen in the past year. According to an industry report, homeowners across the nation saw equity increase by 34% in the last year to an average of $207,000 per borrower. This is all thanks to a historic seller’s market where demand has surged and inventory is scarce.
But what if you want to remodel your home? Or need to cover a large, unexpected expense? Wouldn’t it be great to tap into that value and turn it into cash? With a Waco home equity loan, like one from TFNB, it’s possible for you to turn the equity in your home into money in your pocket.
Below, we’ll explain what a home equity loan is, how they work, and what you should consider before you get one.
What is a Home Equity Loan?
A home equity loan is a loan that uses the equity of your home as collateral. If you’re not familiar with the term “equity,” it’s the amount that your home is currently worth (AKA its market value), minus what you still owe on your mortgage.
Essentially, a home equity loan allows you to tap into the value of your home and access funds that you can use for virtually anything—from debt consolidation to home improvements and covering unexpected medical bills.
How Does A Home Equity Loan Work?
Usually, a home equity loan serves as an additional debt on top of an already existing mortgage. They’re sometimes even called a “second mortgage,” and they work much like a standard mortgage.
Your lender will look at your home’s equity and other important financial factors—like your credit score and income—to determine the loan amount and interest rates.
The current appraised value of the home.
— The remaining balance on your mortgage.
= Your Current Home Equity
Here’s a quick example to help you figure out how much equity you have:
- The appraised value of your home: $500,000
- Minus your current mortgage balance: $300,000
- Your home equity= $200,000
You can usually borrow up to 80% of your home’s value (minus your current mortgage balance) with a home equity loan, but this can vary depending on the lender and your financials. Using the example above, this would allow you to potentially receive a $125,000 home equity loan.
Once approved, you’ll get a lump sum of cash that you’re free to use however you want. Like a mortgage, you’ll pay it back in fixed monthly payments (with interest) over the term of the loan. Generally, home equity loans have terms that range from five to fifteen years, but again, this varies from lender to lender.
And also like a mortgage, these loans use your home as collateral. That means that they tend to have lower interest rates than unsecured personal loans and credit cards as home equity loans are less risky for the lender because they’re secured debt.
However, they also carry a major risk: if you can’t make your monthly payments, you could lose the roof over your head.
What to Consider Before Applying for a Waco Home Equity Loan
There are a lot of reasons borrowers like home equity loans, but just like any form of debt, home equity loans have some drawbacks, too.
Here are some pros and cons you should consider before you start filling out the paperwork:
- Long loan terms and large loan amounts are available
- Fixed interest rates with fixed monthly payments make it easy to budget for
- Typically lower interest rates compared to credit cards and personal loans
- You can use the money however you like
- Your home is used as collateral and can be taken from you if you default on the loan
- Interest rates are typically higher than a standard mortgage
- You must repay both your first mortgage as well as the home equity loan in full if you sell your home
- Expect to pay about 2% to 5% of your loan amount in closing costs
- You could overspend if you take out too much, which is particularly risky if you’re not disciplined about using the money for a useful, specific purpose
What Can You Use a Waco Home Equity Loan For?
One of the best things about home equity loans is that you can use them for just about anything. People often use them for home improvements because they can add value to their homes and increase their home equity all while taking advantage of comparatively lower interest rates, longer terms, and larger funds. Plus, the interest you pay may be tax deductible if you use the funds to “buy, build, or substantially improve your home,” according to the IRS.
But there are other non-home-related uses for these loans that make financial sense in some cases, including:
- Consolidating your high-interest debt
- Covering unexpected medical bills or major expenses
- Starting your own business if you lack the capital to get started
- Paying for education when you’ve maxed out your financial aid and federal student loans
Just because you can use a home equity loan to pay for just about anything, that doesn’t mean you should. Don’t take out a home equity loan for non-essential expenses like a vacation, luxury items, or a wedding. Instead, try to save up for those expenses over time, or explore other financial options, so you can pay for them without risking going into foreclosure.
The Bottom Line on Home Equity Loans
The bottom line? A home equity loan can give you a lot of buying power to achieve goals such as starting a business, paying for college, or upgrading your home. And it might make financial sense to apply for one if you have a clear idea of how to use the money and are confident you can pay back the fixed monthly amount.
But you should also consider risks associated with a home equity loan, which include the potential of losing your home if you can’t pay.
At TFNB, We're Here to Help You Fund Your Dreams
Since 1889, TFNB has empowered our neighbors to turn their plans into action. Whether you want to use a home equity loan to finance what’s important in your life or simply want to learn more about them, our friendly, local loan advisors are always happy to walk you through your options and guide you to the choice that makes the most financial sense. Contact us today, or visit one of our locations. We’d love to chat about your financial goals and how we can help.
If you have any questions or would like to know more about our banking solutions, contact us at 254-840-2836