As you start to pay down your mortgage, you begin to build home equity. If you take the market value of your home and subtract your remaining mortgage payments, this is the value of your accumulated home equity. Generally speaking, it’s one of the largest sources of net worth for homeowners.
Your home equity will also increase with the value of your property. Many things can contribute to your property value going up, such as home or neighborhood improvements. Aside from being a large source of net worth, you can also borrow against your accumulated equity in the form of a home equity loan. These types of loans are generally preferred over other credit sources for many different reasons.
Home Equity Loan Advantages
If an expense or an emergency arises, your first instinct may be to turn to credit cards to cover these purchases. If you own a home, however, there are several benefits of choosing a home equity loan instead.
- Lower interest rates. Typically, home equity loans have a lower interest rate than other forms of credit. Additionally, they usually come with a fixed interest that won’t vary from year to year.
- Availability. Seeking to utilize a home equity loan is a way to get a large chunk of cash in a relatively short amount of time.
- Funds are in cash. As opposed to other types of credit, you’ll be able to access actual cash to complete your purchases.
Reasons for Using a Home Equity Loan
Generally speaking, home equity loans have longer repayment periods. This can include anywhere from five to 15 years. Because of this, home equity loans are a great way to pay for long-term expenses.
Home repairs are one of the most common reasons that homeowners decide to take out a home equity loan because they are generally more expensive than short-term obligations. While this can include emergencies, you can also access these funds to make improvements to your property and increase the overall value.
Aside from home improvements and repairs, home loans can be a great way to consolidate high-interest debt. Because home equity loans traditionally have much lower interest rates than credit cards, you can save yourself thousands of dollars by paying off your credit cards with the funds from a home equity loan.
While home equity loans are a great way to tap into the resources of the equity in your home, they should never be used to purchase luxury items or increase the amount of your debt frivolously.