Tapping Home Equity: How, When and Why It Makes Sense
Tapping Home Equity: How, When and Why It Makes Sense

As the mortgage is paid off, the difference between the value of the house and what remains to be paid — the equity — increases. This equity increases further if the value of the house continues to rise. Equity is considered an asset of the owner and is often the biggest asset he owns.

Home equity loans offer homeowners a way to access this asset. This type of loan uses the home as collateral, offering better terms and lower interest rates than unsecured debt like a credit card, but many homeowners don’t realize they have this option. Here are five common questions we often get about home equity loans and their potential purpose:

Why should I consider tapping into the equity in my home?

In general, home equity loans can be a good choice when you need a large sum of money for a long-term, value-added purpose. Home improvement projects, consolidating higher interest rate debt, helping to buy a second home or vacation property, or offsetting the cost of education can be good options. uses if the extra loan payment fits your budget. Don’t forget to factor in closing costs, a home appraisal, and other fees.

What is the difference between a home loan and a line of credit?

With a home equity loan, the borrower receives the full amount of the loan after closing. There is a payment schedule and a fixed interest rate which ensures that principal and interest are repaid on a certain date. A line of credit, on the other hand, allows the homeowner to access a specific amount of credit that they can access when needed. Interest rates vary and scheduled payments often cover interest only – the owner is responsible for paying the principal on their own schedule. Often, lines of credit are good for those with excellent credit who need flexibility and can pay off the loan fairly quickly.

How can a home equity loan be used to increase retirement income?

First, a home equity loan can increase the longevity of your portfolio. If you borrow funds from your 401(k) while you work, those dollars are no longer invested and you may miss matching dollars. Since this money no longer participates in the market, it is not certain that the possible return on your investment will exceed the interest rate you pay on a home equity loan. Second, once you retire, a home equity margin can be tax efficient and you have the opportunity to sell investments in a down market. Talk to an advisor to see if a home equity loan or line of credit is right for you.

When is a home equity loan not a good option?

There are several reasons why a home equity loan might not be suitable. First, you need sufficient capital. Many lenders offer up to 80% of your home’s value, minus what you already owe. Second, you need a good credit report and history to get the best deal. Third, your loan amount must meet a certain threshold. If you don’t meet these criteria, a personal loan may be a better option, or you can choose to defer borrowing until you meet the requirements.

When should I start the home loan process?

Sooner than you think! Although many lenders start with a simplified online application process, they generally require an assessment, credit check, and additional steps. You may need a few weeks or more to get loan approval, so plan accordingly.

A home equity loan or line of credit is only part of your overall financial picture. At Alerus, our advisors get to know your whole story. They will assess your savings, retirement, mortgage, general goals and more to help you find the right solution for your financial needs. If a home equity loan is the right solution, they offer competitive rates and terms. Speak to an Alerus advisor today.


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