What Could You Use Your Home Equity to Finance?

Are you a homeowner looking to fund a home renovation project or pay off high-interest debt? You may want to consider using your home equity to finance home improvements or other expenses.

It can be a valuable resource for homeowners looking to finance large expenses.  We’ll cover the basics of home equity loans and home equity lines of credit (HELOCs), as well as renovation loan financing options. By the end of this post, you’ll have a better understanding of the options for using your home equity to finance renovations and other expenses.

What is home equity? Before we dive into the specifics of financing options, let’s first define what home equity is. Home equity is the amount of your home that you actually own. It’s calculated by subtracting the outstanding balance of your mortgage from the current value of your home.

Option 1- Home Equity Loans
A home equity loan is a type of loan that allows you to borrow against the equity in your home. You’ll then repay the loan with interest over a set period of time. With a home equity loan, you receive a lump sum of money that you can use for any purpose.

Pros:

• Fixed interest rates: Home equity loans typically come with fixed interest rates, which can make budgeting easier.
• Lump sum payment: With a home equity loan, you’ll receive a lump sum of money that you can use for any purpose.
• Tax deductible: In some cases, the interest you pay on a home equity loan may be tax deductible.

Cons:

• Closing costs: You’ll likely have to pay closing costs when you take out a home equity loan.
• Risk of foreclosure: If you’re unable to repay the loan, you risk losing your home to foreclosure.
• Higher interest rates: Home equity loans may have higher interest rates than other types of loans.

Option 2- Home Equity of Lines of Credit (HELOCs)
A HELOC is a type of loan that allows you to borrow against the equity in your home, similar to a credit card. With a HELOC, you’ll have access to a line of credit that you can draw from as needed. You’ll only pay interest on the amount you borrow, and you can repay the loan over a set period of time.

Pros:

• Flexibility: With a HELOC, you can borrow as much or as little as you need, up to a certain limit.
• Lower interest rates: HELOCs may have lower interest rates than other types of loans.
• Tax deductible: In some cases, the interest you pay on a HELOC may be tax deductible.

Cons:

• Variable interest rates: HELOCs typically come with variable interest rates, which can make budgeting more difficult.
• Risk of foreclosure: If you’re unable to repay the loan, you risk losing your home to foreclosure.
• Fees: You may be charged fees for using a HELOC, such as annual fees or transaction fees.

Option 3- Renovation loan financing options
If you’re specifically looking to finance a home renovation project, there are several financing options available to you. These include:

• Fannie Mae HomeStyle loans: These loans are also designed to help homeowners finance home improvements. They can be used to purchase a home that needs renovations, as well as to refinance an existing mortgage and fund home improvements.
• FHA 203(k) loans: These loans are backed by the Federal Housing Administration and are designed to help homeowners finance home improvements. They can be used to purchase a home that needs renovations, as well as to refinance an existing mortgage and fund home improvements.
• VA renovation loans: These loans are available to eligible veterans and can be used to finance home improvements, as well as to purchase a home that needs renovations.
• Energy-efficient mortgages (EEMs): These mortgages are designed to help homeowners finance energy-efficient improvements to their homes.

When considering financing options for home improvements or other expenses, you must be sure to compare interest rates, terms, and fees to find the option that works best for you. There are multiple ways you can use your home equity to finance what you’d like to do!