How to Use Home Equity to Finance Life Events
If you’ve been paying your mortgage for a while, or purchased a house with a large down payment, you’ve probably built up some equity in your home. Maybe you’ve heard of home equity loans or home equity lines of credit but aren’t sure when to use them or why they might be an option for you. BancFirst can help you understand home equity and how you can use it to finance your life events.
What is Equity in a House?
Home equity is the difference between how much your home is currently worth (or its market value) and how much you still owe on your mortgage. Here’s a quick example to help you figure out how much equity you have:
Your Current Home Value: $200,000
Your Current Mortgage Balance: $150,000
Your Home Equity: $50,000
How You Can Use Home Equity
Lenders allow you to borrow against your home’s equity, using your home as collateral, which is why they are sometimes referred to as second mortgages. The equity that you’ve built up in your home can be leveraged for a variety of purposes, including:
• Home improvements
• Debt Consolidation; credit card debt, unsecured debt, high interest debt to name a few
• Weddings
• Education and College
• Vacations
• Major life events
What are the benefits of using your home equity to finance these types of projects? Home equity loans usually have a lower interest rate. They can also give you access to a large sum of money, and the interest costs may be tax-deductible*. There are two different ways you can access your home’s equity: through a home equity line of credit or a home equity loan.
* You should consult your tax advisor.
How Does a Home Equity Line of Credit Work?
With a home equity line of credit, or HELOC, after one streamlined application, you can advance as often as you need. By asking for an advance, you are asking the bank to take money from your loan and deposit the funds into your checking account for your use. This is similar to a credit card in that once you pay off what you’ve advanced, you can advance more up to the maximum determined for your loan. For example, if you have a $20,000 line of credit and advance $6,000 and pay $3,000 toward the principal, you’ll have $17,000 in available credit. With HELOCs, the interest rates are variable, and your payments are based on how much credit you’ve advanced, as well as the current interest rate.
What is a Home Equity Loan?
A home equity loan allows you to take out a lump sum of money, similar to a personal loan. Like a home equity line of credit, your home equity loan will be determined based on the value of your home and your mortgage balance. With a home equity loan, your interest rate may be fixed or adjustable and your interest payments may be tax-deductible*. In contrast to a HELOC, you can’t continue to advance money once you’ve paid back the principal.
How to Get a Home Equity Loan or Line of Credit
To qualify for a home equity loan, lenders will look at your debt-to-income ratio, or DTI, to figure out how much of your income is already promised to other lenders. This factor helps lenders determine if you’re a good fit for this type of loan. Typically, the lower your DTI, the greater chance you have to qualify for a home equity loan or line of credit.
Lenders will also consider your loan-to-value ratio, or LTV. This is the amount you still owe on your mortgage divided by your home’s current market value. To make sure your home’s value is accurate, you’ll need an appraisal. Typically, the lower the ratio, the better your chances of qualifying.
There are several other factors to consider when qualifying for a home equity loan or home equity line of credit. Our lenders will look at your complete financial profile when considering qualification.
Building up equity in your home is like keeping money in the bank for a rainy day. If you need extra money to pay for your children’s education, make home improvements or pay unforeseen expenses, tapping into your home equity could be a good option. Contact BancFirst or visit an Oklahoma branch to explore our options and find out if a home equity loan or HELOC is right for you.