Tapping into the equity of your home can be a great way to borrow money at lower costs and interest rates than other financing options such as personal loans or credit cards.
Tapping into the Equity of Your Home Could Include
Home Equity Line of Credit (HELOC)
Home Equity Loan
Cash-out Refinancing
Why Are Rates Lower?
Because you are using the equity in your home to secure the loan, there is less risk to the lender that the loan will not be repaid. Although the holder of the first mortgage is first in line to receive funds. This allows the lender to offer lower interest rates on these types of loans.
When the loan is a first mortgage, as with a cash-out refinance, there is even less risk because the lender is first in line if the loan is not repaid. With a cash-out refinance, you will be paying off your existing mortgage – if you have one – and taking out additional funds in cash at the same time. As a result, you’re receiving the additional cash at the interest rate of a first mortgage, which is relatively low.
Why Use Home Equity?
It is important to remember that using the equity of your home in any of these products isn’t free money, it’s a loan that will need to be paid back.
That said, there are a few reasons these products might make sense.
To Avoid Using Higher Interest Rate Credit
If you’re in a financial situation where you need to borrow money, tapping into the equity of your home could help you avoid using a credit card or personal loan with a higher interest rate.
If, for example, you need to borrow money because you’re behind on bills, you may want to consider cutting your costs or selling possessions to avoid digging yourself into a hole.
Also, consider that the application and approval process for home equity products can be lengthy and therefore might not be ideal if you’re in a pinch.
Home Improvements
Home improvements are a common reason to tap into the equity of your home. Certain improvements can be a good investment as they may increase the sale price or appeal of your home when you choose to sell.
If this is your intention, remember that certain improvements have greater returns on the sale price of a home such as adding a bathroom or bedroom.
Debt Consolidation
Tapping into the equity of your home can be used for debt consolidation. In other words, you can swap higher interest rate debt like that of credit cards, personal loans or student loans for a lower interest rate equity secured loan.
If you have a good debt payoff plan, restructuring debt in this way could help you pay off debt more quickly.
Wedding Expenses or Student Loans
Weddings and student loans can be hard to pay for out of pocket. Using your home equity could be a way to cover the cost.
Consider the Fees
As with any lending product, there are fees to consider. Adding fees into the picture might make one lending product more, or less, attractive.
Next Steps
Lending products are just tools. If you want to discuss your options and figure out whether tapping into your equity makes sense, WECU’s loan officers can speak with you over the phone, in-person, or on Zoom. Schedule a meeting today.
