What Is Home Equity?
Home equity is the difference between the appraised value of your home and any current mortgage balance(s). For example, if your home is currently appraised at $325,000 and you owe $200,000 on your mortgage, your home holds $125,000 in equity. As the value of your home increases and you continue to pay down your mortgage, the equity in your home increases.
5 Things To Know About Home Equity
If you're looking to tap into the equity of your home, it'll be worth your time to do some homework. Understanding the pros and cons of loan products on the market and how each might impact you can help you make the right decision for your needs.
To get you started, here are the five most common questions (with answers!) that we get about home equity.
1. How can I access my home’s equity?
There are three common ways to tap into home equity: cash-out refinance, fixed-rate home equity loan, and a HELOC. With a cash-out refinance, you will be able to pay off your existing mortgage and get a cash payment for the remaining balance of the new loan. A fixed-rate home equity loan, often called a second mortgage, lets you borrow one time at a fixed rate. With a HELOC, a credit line is established against the equity in your home, allowing you to borrow as needed.
2. What's the downside to tapping into home equity?
As with a first mortgage, home equity loans and home equity lines of credit must be paid on time. You are putting your house at risk if you do not meet the terms of the agreement because your home is collateral for the loan.
3. Will I need to get my home appraised?
Yes. A professional appraisal will indicate your loan-to-value ratio, which is necessary to determine how much equity is in your home.
4. Will I have to pay private mortgage insurance (PMI)?
Private mortgage insurance is not required on our HELOCs. PMI only applies to first mortgages.
5. What will my closing costs be?
Borrowing against home equity can feel like financing a first mortgage. There may be closing fees, such as an application fee, loan processing fee, points, origination and underwriting fees, appraisal fee, broker fee, recording fee, and annual fee. Not every lender will charge these fees, so it is recommended that you spend time comparing offers. At Hanscom FCU, you will not incur closing costs on a HELOC.
Ask questions of several lenders to understand the variety of home equity products on the market and what is required of each. A little homework now will help your home’s equity work for you in the future.
How Increased Home Equity Affects Your Finances
Here’s some uplifting news during a time of so much turmoil: real estate values are on the rise in many parts of the country. In Massachusetts, single-family home prices were up about 8.2 percent in July 2020 from July 2019 prices, according to the Warren Group, a real estate and financial information research firm.
Low interest rates, market appreciation, and more buyers than sellers (also known as a "sellers market") can be welcome news for homeowners, especially during a time when there are so many financial challenges for many. Greater home equity means more value in your financial holdings.
Here are four things to think about if you want to take advantage of increased equity in your home:
Say Goodbye to PMI
You might be able to eliminate your PMI, which stands for private mortgage insurance, if you have it. Mortgage holders are generally required to pay private mortgage insurance when their down payments are less than 20 percent of the appraised home value.
This is a potentially generous benefit of rising home values. If you’ve owned your home for more than five years and your loan balance is less than 80 percent of the home's value, you have a good case for canceling your PMI.
Losing your PMI could amount to a healthy savings. In general, mortgage insurance costs about 0.5 to 1.5 percent of your loan amount per year. This means a $250,000 loan could be costing you $1,250 to $3,750 annually, or about $100 to $315 per month.
Remember, though, that to determine your official home value, you will need an appraisal. These can cost about $375 to $450, on average, and could be considerably more, depending on the specifics of your property. You will make this money back if you can drop the PMI, but be fairly certain that your home's increased value will make it worth your while.
Make Your Home Work for You
Been living with an outdated kitchen or wishing you had some extra cash to improve your landscaping? Rising home values can provide an opportunity for a home equity loan. The equity in your home can be used to increase your home's value even more. Since home equity loans tend to have much lower interest rates than credit cards have, it's a smart solution to fixing kitchens stuck in the 90s and creating spectacular curb appeal. Bonus: the interest paid on these home improvement projects with a home equity loan or HELOC can be deducted from your taxes when you itemize your deductions.
Keep in mind some projects nearly pay for themselves in resale value. These high-value improvements are surprising: garage door replacements, manufactured stone veneers, and even a minor kitchen remodel all have high recoup rates.
But remember: this is still a loan that must be repaid, which will add to your monthly expenses.
Check That You're Adequately Insured
If your house is worth more, you'll need to adjust your home insurance policy to cover its increased value. Take a careful look at your policy and check in with your insurance agent to be sure.
Be Tax Savvy
It's unfortunate, but when property values go up, so do property taxes. Also home improvements, such as a new garage, an addition, or even a fence in the backyard, can increase the assessed value of your home, which your town uses to determine your property tax. If your assessment goes up and you think it's unfair or unreasonable, you can appeal it and ask for a lower assessment. Some communities even give older Americans property tax exemptions. Check in with your local senior center for information on this and other potential cost-saving measures.
Wise Home Equity Planning
For savvy borrowers, using home equity for specific purposes makes sense. Rates are lower than most other types of borrowing, because the line of credit is secured by your home. Many homeowners also lower their tax bills, since the interest on home equity is often tax deductible.
The most popular reasons homeowners tap their equity is for home improvement projects, debt consolidation, and to cover college tuition.
If you are dealing with any of these scenarios, you’ll want to learn everything you can about home equity borrowing. Here are two of the most common questions we get.
How long does it take to process a HELOC?
When you take out a HELOC, you also go through a closing process similar to when you got your mortgage. Thankfully, it’s typically not as complex. Normal processing time is two to four weeks.
When we receive your application, a loan underwriter reviews your financial profile and compares it to the loan requirements. The underwriter has special training and experience to verify that the line of credit is within reach financially for you and safe for the credit union.
Next, it’s time to take a look at your property. Our goal is to get the most accurate value possible. This is a crucial step, because it can affect your rate and how much you can borrow.
A title agent helps ensure the home does not have existing liens or debts that could affect the property value. Finally, home equity specialists at the credit union prepare the documents for you to sign.
Throughout, we depend on you to supply documents and information. Having this documentation organized and ready at the beginning of the application process can help simplify the process which in turn can lead to a faster turnaround time.
Do I need an appraisal?
The answer is yes...and no. In order to determine the amount you can borrow, we have to know the value of your property. But most of the time, a full appraisal is not required for a home equity.
We often can get an accurate valuation of a home through an automated valuation based on public records about your home. Other times, a simple drive by from an appraiser will suffice. As long as the public record data on your home is accurate, these types of appraisals are quite accurate.
An accurate, updated appraisal protects you from borrowing too much against the value of the home and risking getting into financial trouble. It likewise protects the membership of the credit union from loaning too much against the value of the home.
Put Your Home Equity To Work
As previously mentioned, tapping your home equity can be an ideal way to finance big-ticket items such as large home improvement projects, college tuition and expenses, or manage medical expenses. It is even more appealing thanks to lower interest rates and potential tax advantages.
If you’ve lived in your home for a while, you probably have built up some equity, and that can create a lot of borrowing power. Because your loan is secured by your home, you typically pay less interest than you would for other types of borrowing, such as a personal loan or a credit card.
Know Your Home Equity Options
Most homeowners have two choices: a home equity loan or a HELOC. However, Hanscom Federal Credit Union’s 3 in 1 Home Equity Advantage Plan combines the convenience of an equity line of credit, with options for fixed rate advances and a credit card. There are no application fees, no minimum draw requirements, and no closing costs.
Expert Financial Guidance
Our home equity and mortgage experts are happy to answer your questions and help you understand your available options. We understand your unique financial needs and have the tools and expertise to help you achieve your goals. Let our dedicated home equity team find the perfect solution to make your financial dreams a reality.
Still curious about how you can leverage your home’s equity? Learn more about our available home equity solutions today!
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