3 Popular Uses For Your Home Equity
Rising home values mean homeowners have an opportunity to tap into their home equity as a source for cash. Home equity products — a line of credit or a loan for a pre-determined amount — are secured using your home as collateral. Both equity products offer the ability to pay for big-ticket items at a lower interest rate compared to unsecured loans, which mean lower monthly payments. What’s more, the interest you pay may be tax-deductible.*
Maybe you dream of going back to school to earn that degree you’ve always wanted. Or perhaps you’re facing ever-increasing tuition expenses for your own children. Either way, using your home’s equity to cover educational expenses is an excellent way to deal with expensive college or private school expenses.
One great advantage of a credit line is that you make payments only after you’ve drawn on the funds. If you are approved for a $100,000 home equity line, but only use $25,000, you only pay interest on the $25,000. This kind of financial flexibility is perfect for multiple needs, such as tuition or projects where the exact cost might not be apparent. Either way, you can take comfort in knowing funds will be available when needed.
Besides paying for educational expenses, homeowners can draw on the equity in their home to pay for remodeling or other home-improvement projects. With the continued low inventory of homes currently on the market, it may make more sense to remodel rather than move; maybe you need more room for a growing family, or need to repair damages to your roof from the recent high winds.
“Your reason for borrowing will help you determine which product is right for you,” said Derek Wong, Vice President of Credit Products at First Hawaiian Bank. “If it is for a one-time purchase, like to install a new roof, and you prefer fixed monthly payments over a longer term, then an equity loan could be suitable.”
Home equity is also commonly used for bill consolidation. If you qualify for a home equity line of credit (HELOC), this generally will be the most affordable financing option available, as the interest rate will be quite low relative to other types of financing or unsecured loans. Indeed, paying off high-interest credit cards is a smart way to reduce monthly expenses.
“Home equity loan rates are typically lower than that of unsecured personal loans and credit cards, since the home is used as collateral,” said Wong. “This could translate into lower, more manageable monthly payments versus higher interest-rate loans and credit cards. Also, First Hawaiian Bank’s home equity line of credit and equity-loan products have different amortization options to fit your needs.”
To figure out how much equity you have, estimate the market value of your home and subtract the total of outstanding mortgages plus any other liens on the property. Keep in mind that most lenders have limits on the loan-to-value (LTV) ratio. “For most owner occupants, there is a maximum LTV of 80 percent, which means you can borrow up to 80 percent of your home’s assessed value.”
That tax refund check is a great way to open a college fund for your keiki or to sufficiently beef up your savings account to provide the level of security your family needs. But if it isn’t enough, or you don’t have time to save what you need, borrowing on the equity in your home is a good way to cover big-ticket expenses. First Hawaiian Bank is currently promoting its home equity loans and lines of credit with amazing rates through the end of May. Talk to one of its personal bankers to find out more about what equity products best fit your needs.
* Consult your tax adviser.