If you were one of the millions of Americans who were slammed by the mortgage meltdown of 2008, there’s a good chance that you view the concept of “home equity” with a fair bit of skepticism. If you haven’t checked to see if your home has gained value recently, you just might be pleasantly surprised. In many parts of the country, home values have actually risen significantly over the past few years, which brings us right back to home equity and your ability to tap into it with a home equity loan. But first, let’s back up and get a little background.
Home Equity – What Is It?
Simply put, home equity is the difference between your home’s fair market value and the amount you still owe to your lender. The equity in your home can increases in two basic ways. One way is to make mortgage payments to your lender. The other is for the value of your home to increase in the marketplace over time. The more either of these things happen, the greater your home equity. The first cousin of the home equity loan is the home equity line of credit (HELOC).
The Home Equity Loan – How to Get Cash From Your Home
If your home has equity, you may be able to use that equity as a way to finance the things you want out of life. These are usually big-ticket things like a college education, a home addition or renovation, or an awesome bass boat. The equity in your home serves as collateral, so you can get the money for what you want or need. After this happens, your home’s equity will be reduced.
Strategies for Paying Back Your Home Equity Loan
So, after you’ve tapped into the equity in your home and purchased that higher education, beautiful home improvement or amazing bass boat, what comes next? You’ll eventually need to pay back that loan. When you have to pay it back is up to you and your lender, but there are three main strategies as to what to do when your home equity loan is due.
Strategy 1 – Pay More Than the Minimum
Paying over the minimum amount that’s due each month will save you money on interest and allow you to pay off the loan sooner. This is a great, financially responsible strategy if you have the funds to make it happen.
Strategy 2 – Refinance
If you can refinance your home equity loan to a shorter term or to a lower interest rate, do it! A shorter term means that you’ll be done paying for the loan earlier. And, a lower interest rate means you’re paying less in interest – which can lower your monthly loan amount, or you can apply the difference to your principal.
Strategy 3 – Sell Your Home
If you’re ready to sell your home, you can pay off your home equity loan with the proceeds from the sale. In fact, paying off any home equity loans or other liens is usually a condition that comes with the sale of any home.
Regardless of the strategy you decide to use to pay it off, the home equity loan can be a great option for generating the funds you may need to pay for some of the big ticket items in life.
Do you have any questions on home equity loans? Let us know in the comments!
If so, subscribe now for tips on home, money, and life delivered straight to your inbox.