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  Monday, September 1, 2014  
   
 

 
Home Equity

A Home Equity Line of Credit Makes Home Improvement Projects Easier

Basically what this is is borrowing money using your home’s equity as collateral.  To break this down even further your home’s equity can be determined by subtracting how much you owe on your mortgage from the value of your home.  For new home buyers the home’s equity is usually the initial down payment and the amount of principal paid on the house. 

For those who have been in their home for an extended period of time the home’s equity could be much higher.  To determine this first you must first determine the value of the home, as they tend to go up over time, and then subtract the remaining mortgage balance.  It is often surprising how much equity a home can gain in just a matter of a few years.

“Home equity lets you put your home equity to work for you,” says Patricia Gallagher from Eastern Virginia Bankshares (EVB).  “You can use the funds for many purposes, such as a well-deserved vacation, college, home improvements, and so forth.”
Most home owners agree that equity in their primary home is an important financial aspect, but fewer plan to use it.  Home owners often believe they are tied to their original loan and don’t bank on equity or the ability to change loans or otherwise manage the asset as they do other investments.

Only a few of those with equity are inclined to tap into it at all. Most homeowner prefer to use the money they can get for their home’s equity only for home improvements, a worthwhile use if the improvement provides a good return for the money, but not the only use.

“The beauty of a home equity line is it gives you a tremendous amount of borrowing flexibility,” notes Lucy McCarthy of Bank of Essex.  “Once you obtain the loan you simply write a check to access more funds.  Therefore, you don’t have to visit your lender each time you need money.” 
An equity loan, by nature is an equity depleting loan, but when used for capital improvements that provide a greater return than the cost of the money, they can be a wise use of home equity.
Other approaches to managing equity as an asset include:
. “Home equity loans can be advantageous because the interest paid could be deductible on your tax return.  Of course you would want to consult your accountant before taking this step,” notes Nancy Baughan of Northern Neck State Bank.
. Obtaining a new loan to stop the upward march of interest rates on a adjustable rate mortgage (ARM). Even a slightly higher fixed rate will be more manageable compared to an ARM allowed to adjust to it’s maximum amount. If your new loan is cheaper, continue paying the old amount to generate more equity faster.                                     
.“In a falling rate environment, home equity lines become even more attractive, because they are variable rate loans tied to an index,” adds McCarthy.
. Refinancing to use some of the equity to finance capital improvements, start a new business, pay for education or other low-risk investment likely to yield a return.
. “Home equity credit lines are also cost effective.  In some financial institutions, you are only billed for interest monthly and you may pay any amount on principal.  They can also be used for many years as a line of credit,” adds Baughan.
. Tapping equity before it is needed, say before a job loss, at which time a lender will be less likely to approve the loan. The funds won’t cost consumers until they actually use them, but they will be available in an emergency. Likewise tapping equity for the one time use of consolidating debt—provided the consolidated accounts are closed and not reopened—can be a cheaper way to pay down debt.
. Using the equity from a first home to purchase a second home, provided the second home is affordable or is an investment property with a positive cash flow from rent or other use income.
. Using the home as a retirement fund in the form of a reverse mortgage. The special mortgages require initial counseling (mandated in some states) and special attention to the details, but they allow home owners at least 62 years of age to tap their equity as tax-free income. The loans aren’t for everyone 62 and older but for some they are worth considering, again, only with great scrutiny.

No matter how home owners approach equity use, the fundamentals still apply.
. Learn and understand the details of financing -- mortgages -- likely to be secured by your most valuable single asset. Knowledge of financial options and the inner workings is crucial to getting the most bank for your equity buck.
. Keep tabs on your current income—wherein lies your ability to pay back
the loan—as well as evaluated future earning potential.
. Be especially attentive of ebbs and flows in commission-based, self-employment, second job income and supplemental wages if those incomes are used to pay the mortgage.
. Keep tabs on equity growth or loss. Loan terms, payments, economy-based appreciation or deprecation are factors contributing to your level of equity.

If you are considering using your homes equity for renovations or improvements to your home contact your local bank and see what they may recommend for you.  With all of the options available a loan officer will be able to help you find a loan that is right for your needs and your budget.