One of the major advantages of owning your own home is that you’re able to build equity that you can turn into cash. Here’s a brief guide to the basics of home equity and how you can use it to secure needed cash through home equity loans.

What is home equity?

Home equity is the appraised value of your home minus outstanding debts, including any loan balances and mortgages, and often builds over time.  As you pay off your mortgage or add value to your home with improvements and upgrades, you can generally expect your home’s value  to increase. As you build equity in your home, you’re able to use it as collateral for future loans.

What is a home equity loan and how does it work?

Home equity loans use the equity in your home as collateral. Since the loans are secured against a high-value item, namely the equity you have in your home, financial institutions generally offer very competitive interest rates, even up to as much as your first mortgage. Compared to personal loans, which often come with higher interest rates, and unsecured borrowing sources like credit cards, you’ll be paying much less in financing fees in the long run to secure the same loan amount.

Keep in mind that equity lenders will place a second lien on your home if you secure a home equity loan. That means they’ll have rights to the home and your first mortgage if you fall behind on payments. It’s a risk you’ll need to weigh carefully before finalizing your loan.

When is securing a home equity loan a good idea?

There are many situations in which a home equity loan is an ideal option for securing funds. Here are some of the most common:

  • Since home equity loans are disbursed as a lump sum of cash, they’re ideal if you need funds for a one-time expense, like your dream wedding or a major home remodeling project.
  • If you’re looking to get back into the classroom and invest in your future, a home equity loan is an ideal way to fund your education.
  • You can also use a home equity loan is for consolidating high-interest debt at a lower interest rate. Many homeowners use their home’s equity to repay personal debts, including car loans, credit card debt and more. The low interest rate of a home equity can save you money on your monthly payments.
  • While most financial experts recommend maintaining an emergency fund to cover three to six months of living expenses, most Americans don’t have access to this amount of liquid cash. If you’re faced with an emergency or unexpected situation, like loss of a job or large medical bills, having a Home Equity Line of Credit can be useful. Securing the loan can be a lengthy process, though, so this may not be the best option if you’re dealing with a time-sensitive emergency.

Need help determining whether home equity loans may be a smart borrowing option for you? Direct Financial can help you to learn everything you need to know about this convenient loan.