Should You Borrow Against Your Home?

Your home is probably your most significant investment, and it's likely worth a lot more than when you bought it. Since it has increased in value, you may be tempted to borrow against your home to pay for major purchases or consolidate debt.

Almost half of the homes in America are considered equity rich. Having high home equity encourages some homeowners to look at ways to use their equity to improve their lifestyles.

This article considers borrowing against your home and the associated advantages and risks.

Researching before tapping into your home investment will help you make the best decision for your situation. And, if you decide to proceed, you'll want to ensure you're using accessed funds effectively for your future security.

Who Can Borrow against Their Home?

Almost anyone can borrow against their home if they have enough equity. If you have owned your home for some time, there's a good chance you have built up enough equity to qualify.

What is home equity?

The amount of your home owned outright equals its equity. However, most people do not own their homes entirely; instead, they have a mortgage – the loan they took to purchase their homes.

Your home equity grows over time as you pay your mortgage and your property value rises. Therefore, the more equity you possess, the easier it will be to access a home equity loan or line of credit.

Your home equity adjusts to real estate values and the act of paying down your mortgage. These actions generally see your home equity grow over time.

How do you build home equity?

Besides waiting for home values to rise and paying your regular mortgage repayments, there are several other ways to grow your home equity.

Firstly, you could make a substantial deposit. This means you can expedite the ability to borrow against your home because this is often the minimum amount lenders require.

Secondly, you can undertake renovations to add value to your property. However, it's essential to be strategic in your choice of renovations. Make sure you get good advice to ensure the work you're having done will increase the value of your home.

How Can You Borrow against Your Home?

The most significant advantage of borrowing against your home is that it's relatively easy to obtain a loan. You're using your home equity as collateral, so the approval process is usually quicker than other loans.

In addition, the interest rate is usually comparatively lower because the lender views your home equity as a low-risk investment. Plus, you can typically borrow a sizable amount of money.

Home equity loans and lines of credit (HELOCs) are popular options. These loans are provided by various lenders, including traditional banks, credit unions, and others.

You'll need a satisfactory credit score and proof of your income and assets to get one of these loans.

Home equity loans

This type of loan is often described as a second mortgage because you are lending against the security of your home.

A home equity loan provides an agreed payout that you repay over a predetermined time frame. In addition, the interest rate is usually fixed, which means your set payments will stay the same for the extent of the loan.

What is a HELOC?

Another option is a HELOC, or home equity line of credit. It operates similarly to a credit card because you can withdraw money as you need rather than accessing a lump sum of cash. However, HELOCs have a variable interest rate, so that they will shift over time.

Reverse mortgages

A reverse mortgage is limited to those who own their home fully or have high equity in their home. Instead of monthly payments, the homeowner receives cash from the lender, which is repaid when the house is sold.

An advantage of a reverse mortgage is not having to make any repayments as long as you stay in your house. The lender only recoups their investment when the house is sold. However, the interest builds up over time, and if this can't be repaid, the lender can foreclose on the home.

Alternative option: Housetable Home Equity Loan

Housetable is an alternative option offering significant benefits to homeowners seeking to add value to their homes through renovation projects.

Our innovative approach harnesses the efficiency of AI technology to create a more secure and beneficial loan arrangement for borrowers.

This allows you to maximize your home equity while boosting lender confidence.

Because Housetable immediately adds the projected value of home renovations to your property's value, your lending power increases. In addition, our AI technology guides advise which renovations will add the most value to your home.

How Much Can You Borrow Against Your Home?

Borrowing against your home means providing your property as collateral. While this makes you attractive to lenders, they will also want to calculate how much risk they are taking on.

Exact terms vary between lenders, but most will only let you borrow up to a certain percentage of the appraised worth of your home after subtracting the owed mortgage balance. These elements are commonly calculated as a loan-to-value ratio (LTV).

What is the LTV ratio?

The LTV ratio, or loan-to-value ratio, is a term used by lenders to determine how risky it is to lend money to a borrower. The LTV ratio is calculated by dividing the loan amount by the property's current value.

For example, if you're borrowing $100,000 against a home appraised at $200,000, your LTV ratio would be 50%. The more the LTV ratio, the more unstable the loan. Usually, lenders will cap the LTV ratio at 80 percent of your property's value.

Do You Have a Good Reason to Borrow Against Your Home?

Many life events may put you under financial strain and encourage you to consider borrowing against your home. For example, unexpected events such as serious illnesses or big family events like weddings can pressure people financially.

But before borrowing against your home, you should be sure that the money you are extracting from your home equity is going to be used for a purpose that will improve your financial position or, at the very least, not put your home at risk.

Does your reason for borrowing against your home stack up?

College costs

While borrowing against your home can be a convenient way to pay for college, weighing the pros and cons before taking out a loan is essential.

The interest rate on a home equity loan is commonly less than the rate you would get on a private student loan. And, if you can get a fixed-rate loan, your monthly payments will be set so you can budget accordingly.

However, you must check the feasibility of paying off college debt before retirement. If the loan is for your child's education, it may be more beneficial for them to take out the loan themselves as they will have a longer working life ahead of them to pay it back.

Debt consolidation

When you're struggling to keep up with your monthly payments, borrowing against your home can seem like an attractive solution.

Consolidating your debt with a home equity loan can be smart, as you'll likely get a lower interest rate than credit cards and similar debts. This can save you money on interest and release you from debt faster.

However, you are using what is known as secured debt - a debt tied to your home value - to pay off unsecured debts such as a credit card or personal loan. Unsecured debts do not involve underlying collateral, so while you may receive a bad credit rating, you will not lose an asset.

As a secured debt, a home equity loan means risking your house if you fail to make repayments. If you struggle with built-up debts, there is a chance that even after paying off your debts, you could find yourself out of funds again. In addition, your home can be repossessed if you fail to make the required repayments.

Emergency expenses

Emergencies like job loss, medical bills, or major home repairs can happen to anyone. However, if you don't have enough cash on hand to cover the cost, borrowing against your home equity may be a viable option.

Just be sure you're using the loan for a true emergency and have no other option. You also need to ensure your critical financial situation can be solved in the short term. That's because using your home equity for emergency costs can often lead to surging debt if you don't have a set plan to meet repayments.

Wedding expenses

You may think that taking out a home equity loan with a lower interest rate than a credit card is a smart option to cover your wedding celebration. However, these costs can easily blow up and leave you struggling to make repayments after the honeymoon.

Rather than risk a rocky start to your marriage with debt stress, it may be better to rein in your wedding costs, start saving well in advance, or seek contributions from close family.

Business expenses

When starting a business or running into financial difficulties in an established company, there is enormous pressure to keep things afloat. Borrowing against your home can be a way to access the capital you need to maintain or grow your business.

However, it's important to consider all the risks before putting your home on the line for your business. It's a massive risk to invest in a new company that hasn't been tested sufficiently, and there is no guarantee of a return on investment, even for an established business.

Therefore, drawing on established home equity for business ventures is rarely advisable.

Home improvements

Home improvements are a popular reason for tapping into home equity. In this case, you get the dual benefits of making your home more comfortable while increasing its value. Therefore you're actually increasing your home equity.

This idea seems like a no-brainer because your investment into adding a deck or upgrading your kitchen can pay for itself over time by boosting your house value.

In this case, a home equity loan or HELOC can make good sense, but only if the planned renovations add value to your home. If you're just making cosmetic changes, you'll unlikely see a return on investment that justifies putting your home equity at risk.

Before deciding on home improvements, it's best to consult with a property expert to get an idea of what changes will add value to your home and how much you can expect to see in return.

To fast-track this process, you can consider using AI technology from Housetable, which gives you the added advantage of adding the projected returns from your renovation to your home's worth, thereby boosting your lending power.

What Are the Risks of Borrowing Against Your Home?

When considering borrowing against your home, be clear about the risks involved. For example, borrowing against your home equity can be a risky move as it puts your home at risk if you can't make repayments.

There are several reasons you may not be able to pay back your loan, such as losing your job, getting sick, or suffering a financial setback. If this happens and you can't make repayments, you're putting your home at risk.

We would advise speaking to a financial advisor to weigh up your option to see if home renovations are the right path for you to travel down. 

However, Housetable has developed home equity loans specifically designed for home renovations. Instead of borrowing against the current value of your home, you can actually borrow against the projected post-renovation value of your home.

This potentially allows you to get the full amount of money you need to complete your renovation project, without having to worry about a high LTV ratio or higher interest rate. 

What this means is that you will be able to forecast monthly repayments to the sum of the value of your home post-renovation. So, why not consider a Housetable Home Equity Loan

Here are some of the advantages of Housetable Home Equity Loans:

  1. You can get up to 87.5% of the expected post-renovation value of your home.
  2. Your existing mortgage remains in place.
  3. Closing costs are limited to the renovation loan only.
  4. No need to hire a HUD expert. We do everything online.

To learn more about your loan options, contact us today.

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