Purchasing a home often stands as one of the most significant investments individuals make. Due to the substantial costs involved, many individuals choose to secure a mortgage, enabling them to gradually accumulate equity in their property.

Home equity refers to the portion of your home that you personally own in comparison to the remaining balance on your mortgage. To illustrate, suppose your home has a market value of $200,000 and your outstanding mortgage debt amounts to $100,000. In this scenario, your equity would be $100,000, representing the difference between the home’s value and the mortgage owed.

There are various methods to build home equity, and one common approach is to focus on paying off your mortgage. When interest rates are favorable, refinancing your mortgage is another option worth considering. Another strategy involves enhancing your home’s value through remodeling or renovations. By investing in improvements, you can potentially increase the property’s overall worth, thereby boosting your equity.

By building equity, you’ll have funds available for major expenses such as credit card bills, college fees, and home renovation. The higher the equity, the more funds are available whenever you need to tap into them. Purchasing a home and increasing equity is great, but how exactly do you get access to the funds that you need?

HELOC

A home equity line of credit (HELOC) functions similarly to a home equity loan, but with a notable difference. Rather than receiving a lump sum upfront, a HELOC allows you to make multiple withdrawals, up to the maximum equity balance, throughout the draw period. HELOCs, unlike a home equity loan, typically have a variable interest rate, meaning it can fluctuate over time.

The application process for a HELOC closely resembles that of a home equity loan. You begin by applying for a HELOC, typically online or over the phone. To assess your eligibility, the lender will request verification of your income and expenses. This may involve submitting documents such as pay stubs, tax returns, and bank statements.

After your initial approval, the lender will arrange for an appraisal of your property. Alongside the appraisal, the lender may require additional supporting documentation, such as property insurance information and proof of title. If all the requirements are satisfactory, you’ll receive final approval for your HELOC and sign the required paperwork. Once the loan is closed, you can start making withdrawals from your HELOC based on your approved credit limit.

HELOCs are often considered suitable for long-term, recurring expenses that require ongoing funding. They can be effectively utilized for purposes like financing college tuition, settling medical debts, or undertaking substantial home renovations. These types of expenses typically span an extended period, making the flexibility of a HELOC advantageous.

Home Equity Loan

A home equity loan, also referred to as a second mortgage, is a loan that leverages the equity you have accumulated in your home. It involves borrowing a lump sum of money, which is secured by the value of your property. When you are approved for a home equity loan, you receive the loan amount as a single, upfront payment. The loan agreement specifies a predetermined period during which you must repay the loan.

Applying for a home equity loan is generally a straightforward process that can be done online or over the phone. You start by submitting an application for a home equity loan, providing necessary information such as personal details, financial information, and the purpose of the loan. A loan officer will review your application and may schedule an appraisal or property evaluation to determine the current market value of your home.

Once your application and supporting documents are reviewed and approved, the lender will provide formal loan approval. At this stage, you’ll review and sign the loan documents, which outline the terms, interest rate, repayment schedule, and any associated fees.

A home equity loan can be a beneficial choice for individuals who have specific financial goals and circumstances. If you have accumulated high-interest debt, such as credit card balances or personal loans, a home equity loan can provide an opportunity to consolidate those debts into a single loan with a potentially lower interest rate. With a lump sum payment from a home equity loan, homeowners can access a substantial amount of cash to finance home improvement projects.

Co-Investment

Shared appreciation or co-investment is a financial arrangement where homeowners can access the equity in their property by partnering with an investment company. The exact percentage or share of the appreciation is agreed upon in the contract between the homeowner and the investor. If the value of the property increases during the term of the agreement, the investor is entitled to a portion of that appreciation.

To apply for a co-investment or shared appreciation arrangement, you need to look for a reputable shared appreciation company that offers co-investment programs. When you find a suitable shared appreciation company, you’ll need to provide them with the necessary information to verify your income, expenses, and property details. If approved, the shared appreciation company will agree to pay you a lump sum amount based on the agreed-upon portion of the equity in your home.

Unlike traditional loans that heavily rely on creditworthiness, co-investment focuses more on the equity in the property. This means individuals with poor credit scores or limited credit history can still qualify for a co-investment arrangement, making it a viable option for those who may not qualify for other types of loans.

Cash-Out Refinance

A cash-out refinance is a financial strategy that involves refinancing your existing mortgage with a new mortgage for a larger amount than what you currently owe. The key feature of a cash-out refinance is that you receive the difference between the new mortgage amount and your remaining mortgage balance in cash.

Using the cash-out funds to invest in home renovations or improvements can increase the value of your property. If you have accumulated high-interest debt, such as credit card balances or personal loans, using a cash-out refinance to pay off those debts can be a smart move. Cash-out refinancing can also provide the funds necessary to cover significant expenses like college tuition, medical bills, or major life events. Some individuals opt for cash-out refinancing to free up funds for investment purposes, whether it’s investing in stocks, real estate, or other ventures.

Which option should you follow?

The choice of home equity financing options depends on various factors, including the amount of equity you have, the value of your home, your credit score, and your specific financial goals. Consulting with a loan officer or mortgage professional is highly recommended to assess your individual circumstances and determine the most suitable option.