Simply put, equity is the difference between the current market value of your home and what you currently owe on it. Obviously, the more equity you have the better. In fact, the ONLY problem with equity is it’s inherent LACK of liquidity -or its ease with which you can convert it into cold hard cash.
Fortunately, you have more than one way to skin the equity cat, and as long as you meet several other qualifications, you can have the money you need in as little as a few weeks in most cases.
One way of doing this, especially when you only need a relatively small amount of your home’s equity, is to take out a Home Equity loan, or what’s frequently referred to as Home Equity Line of Credit, or HELOC- essentially a line of credit secured by an additional Mortgage on your home.
Whether you’re looking to remodel your kitchen or consolidate debt, home equity loans are excellent financial tools. You can borrow exactly as much cash as you need within the loan limits, precisely when you need it. And your payments are based on your balance, similar to a credit card; you only pay interest on the balance of your HELOC, not the total line of credit.
Another benefit of a HELOC is the ability to pay down and re-use the available line. For example if you do use the HELOC to remodel a kitchen, then you pay it off over the course of a year or two, that equity is available to you again if you need it. You can pay off and extend the balance of the line as often as you need to.
Many consumers have used their home equity loans wisely for home improvements, debt consolidation, and to fund college educations. The one drawback of home equity lines of credit (HELOC's) are that they are variable in rate. Many consumers who have used their HELOC's are now finding it makes sense to refinance to combine their first mortgage and HELOC into one low fixed rate.
Another benefit of a HELOC is how quickly that money is available. If you are investing in real estate and use wholesaling/flipping strategies to acquire homes and sell them off quickly for a quick profit, a HELOC can help accomplish this and give you more negotiating power with the Seller.
And there is no set, one-size-fits-all format for HELOCs; you can customize your personal HELOC almost any way you need to, making HELOCs very flexible and accommodating financial instruments.
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An equity line can prove invaluable in a slow market as well. If your home drops in value you still maintain your HELOC at the original borrowed amount. This means that while others equity dropped from existence you still have access to yours if the need arises. Having money on hand at the right time can secure your financial future!
One thing to keep in mind about using equity the equity in your home wisely is that sometimes "when life throws you a few curve balls" it may be hard to use or access the equity in your home altogether, at least for a reasonable rate and charge. However, if you have equity in your home currently it is not a bad idea at all to either pull it out through a 1st mortgage refinance and invest that money somewhere safe or obtain a home equity line of credit and just save it for a "rainy day" or for emergency usage. Therefore, don't be afraid to pull equity out of your home, even when you don't need it because many times when people need it, finances change and they can't access it.
Home equity can be a great tool to save money on high interest rate debts or to remodel your home. However, owners should use their equity wisely. For example, when paying off high interest rate debt borrower should make sure they do not run the balances up again. Another reason for using a home equity to payoff unsecured debt is that the interest is tax deductible.