The different uses of equity in your home

There are multiple ways one can leverage the equity in their home for financial purposes. Here are some ways you can get the equity in your home to work for you.

Pay Off Debt

Using equity to pay off debt can save thousands of dollars in interest. Many people who end up taking out a line of credit, or cashing out their equity through refinancing their home use the funds to pay off high interest yield debt. This debt usually includes credit cards, unsecured loans, student loans, and more. There is also a cash flow benefit to paying off debt with equity. Since home loans have longer term pay off periods than nearly all personal loans in the market place, paying off debt like auto loans may not lower the interest you have to pay, but it will open up cash flow in your overall budget. Financial institutions usually cut checks and make them payable to the debtors you tell them that you want to pay.

Open a Line of Credit

Opening a line of credit gives you access to your equity in case you need to use it for financial needs. People access their equity to help pay for home improvements, emergencies that may arise, their child’s student expenses, vacations, large purchases for the house, investing, unexpected expenses and more. A lot of people who have an open line of credit take comfort in knowing that they have liquid access to the equity they’ve built up in their home.

Refinance to lower term, rate, or payment

After paying on a mortgage for a while, your balance decreases, and your house value increases (in a healthy economic environment). You can look at options to lower your interest rate and save money by trying to refinance. The lower your loan to value ratio is (loan balance divided by the home value), the lower rate you are eligible for. The interest rate market changes too, so there will be times where available interest rates at financial institutions are better than when you took out your loan.

You can also use the equity in your home to refinance to a lower term. Shortening the term helps pay off your house quicker and can help you save a lot of money in interest. Many people who have equity built up in their home look at options to shorten their term from 30 to 15 years for examples. It is always important to weigh the costs and benefits to doing this because there are times where trying to shorten the term are not financially advantageous. The evaluation depends on timing, and payment comparison

You can use equity to lower your monthly payment through refinancing. The lower your balance is that you are refinancing, the lower the monthly payment you are able to get (as long as you are not shortening your term most of the time). PMI can also be eliminated by refinancing when your house loan to value ratio goes under 80% on your house. Most homeowners who don’t put a large amount down on their purchase of a house seek to eliminate private mortgage insurance after 3-5 years. Lowering the monthly payment is the most common reason why people seek to refinance.

Take Cash Out

Often people will leverage their equity by taking cash out of their home. People will refinance, or take a line of credit out in order to get cash and do what they desire with the money. Some reinvest into their homes by making home improvements to their houses. Some people stick the cash in their bank accounts