How to Use Home Equity to Finance Life Events

If you’ve been paying your mortgage for a while, you’ve probably built up some equity in your home. Maybe you’ve heard of home equity loans or home equity lines of credit but aren’t sure when to use them or why they might be an option for you. Dominion Energy Credit Union of Virginia can help you understand home equity and how you can use it to finance your life events.

What is Equity in a House?

Home equity is the difference between how much your home is currently worth (or its market value) and how much you still owe on your mortgage. So, if your current home value is $200,000 and your current mortgage balance is $150,000, your home equity is $50,000.

How You Can Use Home Equity

Mortgage lenders allow you to borrow against your home’s equity, using your home as collateral, which is why they are sometimes referred to as second mortgages. The general guideline is that you can borrow up to about 90% of your home’s value, minus what you still owe on your house. The equity that you’ve built up in your home can be leveraged for a variety of purposes, including:

• Home improvements
• Debt consolidation
• Weddings
• Continued education
• Vacations
• Major life events

What are the benefits of using your home equity to finance these types of projects? Home equity loans usually have a lower interest rate when compared to other unsecured loans. They can also give you access to a large sum of money, and the interest costs may be tax-deductible. There are two different ways you can access your home’s equity: through that home equity line of credit or a home equity loan.

How Does a Home Equity Line of Credit Work?

With a home equity line of credit, (HELOC) you can take out the money as you need it during the draw period and can access money with checks, through Digital Banking or at Dominion Energy Credit Union branches. This is similar to a credit card, in that once you pay off what you’ve borrowed, you can borrow more. For example, if you take out a $30,000 home equity line of credit and pay $10,000 toward the principal, you’ll have $20,000 in available credit. With HELOCs, the interest rates are variable, and your payments are based on how much credit you’ve used, as well as the current interest rate. 

What is a Home Equity Loan?

A home equity loan allows you to take out a lump sum of money, similar to a personal loan. Like a home equity line of credit, your home equity loan will be determined based on the value of your home and your mortgage balance. You can borrow up to 90% of the equity in your home, with a maximum of $150,000 and there are no closing costs*.

With a home equity loan, your interest rate is typically fixed, and your repayment amount is the same each month. In contrast to a HELOC, you can’t keep taking out money once you’ve paid back the principal.

How to Get a Home Equity Loan or Line of Credit 

To qualify for a home equity loan, lenders will look at your debt-to-income ratio (DTI) to figure out how much of your income is already promised to other lenders. This factor helps lenders determine if you’re a good fit for this type of loan. Typically, the lower your DTI, the greater the chance you have to qualify for a home equity loan or line of credit. Many Lenders look for a borrower's DTI to be lower than 43%. If you aren’t there yet, try to pay down your debt or reduce your other monthly expenses. 

Mortgage lenders will also consider your loan-to-value ratio (LTV). This is the amount you still owe on your mortgage divided by your home’s current market value. Typically, the lower the ratio, the better your chances of qualifying. LTV ratios often need to be 80% or lower to qualify for a home equity line of credit. Lenders need to keep a cushion of about 20% equity in the home in case payments aren’t made and they need to foreclose and sell the home. At Dominion Energy Credit Union, you can borrow up to 90% of the equity in your home.

Building up equity in your home is like keeping money in the bank for a rainy day. If you need extra money to pay for your children’s education, make home improvements or pay unforeseen expenses, tapping into your home equity could be a good option. To see how much you may qualify for, use our home equity debt consolidation calculator, or check out our home equity loans and lines, along with our rates. Contact us today at Dominion Energy Credit Union to explore our options for homeowners in Virginia and find out if a home equity loan or HELOC is right for you.