Money Smarts Blog

Spring is in the air. The dreary cold of winter is thankfully almost in the rearview mirror, and I’ve already brushed up on organizing and cleaning tips to freshen up my house just in time for warm weather entertaining (have you seen the amount of dust a ceiling fan can collect during the winter? Yuck!).

Sure, spring cleaning puts you in the right headspace to enter the new season. But it’s also a great time to check in on your finances and make some tweaks for a fresh financial start. Depending on your situation, tapping into the equity in your home may give you some powerful financial benefits.

What’s equity, you ask? Great question. Simply put, equity is the difference between what you owe on your mortgage and what your home is worth. Let’s say my house is worth $200,000 and I still owe $150,000. That means I’ve built up $50,000 in home equity.

Once you have enough equity, you can use your home as collateral and borrow against it to help cover large expenses (like the window replacement I’m hoping for in the not-so-distant future).

Since your home is the collateral for the loan, it’s much less risky for your lender. Therefore, you could potentially qualify for a larger sum of money than you would through a personal loan, as well as a lower interest rate.  The interest you pay on these types of loans may also be tax deductible. Discuss it with your tax advisor!

Home equity loans and home equity lines of credit (HELOC) are two popular options to tap your home for cash. So, before you grab your dusters and mops to give your home springtime vibes, let’s compare ways to put a little spring back into your wallet.

Home equity loan

A home equity loan can be a convenient solution for a variety of things: home improvement projects, college tuition, debt consolidation or financing a wedding or family vacation. This type of loan involves minimal closing costs and is served up as a one-time lump sum.

• Fixed interest rate (generally lower than unsecured loans or a credit card because you’re using your house as collateral)
• Monthly payments are the same each month
• Loan up to 90% of property value
• Full amount as a lump sum for non-recurring expenses

Home equity line of credit (HELOC)

I like to compare a HELOC to a credit card — without the plastic. This type of loan gives you the flexibility to draw funds as you need them for ongoing expenses. So, if you’re in the middle of an ongoing renovation where you don’t know exactly how much you’ll need to borrow or when, a HELOC can make sense.

• Can have a variable or fixed interest rate (generally lower than unsecured loans or a credit card, because you’re using your house as collateral)
• Loan up to 90% of property value
• Only make payments and pay interest based on the balance you carry
• Revolving line of credit, so you can borrow what you need multiple times over the period of the loan

So, which option is better for you?

Depends on your situation. At IHMVCU, we strive to help members make the best financial decisions possible. The first thing I like to ask is: how do you want the loan to work for you? Remember: your home is one of the biggest investments you’ll make and, when handled wisely, it can work in your favor to achieve financial success.

How IHMVCU members are utilizing these loans …

Tucker & Savanna

Newly married couple, Tucker and Savanna, are expecting their first child at the end of the year. They purchased their home a few years ago, have some equity built up and are looking to add on to their home for a new nursery.

By setting the amount limit at the beginning of the loan, Tucker and Savanna have the flexibility to do the work over time, since they aren’t exactly sure how much the entire cost of the project will be. They’re only making payments and paying interest on the amount they use.

Layla & Sasha

Layla and Sasha are a married couple who purchased their home 11 years ago. With a good chunk of equity built up, they’re now looking to consolidate debts they’ve accumulated from their kids’ college expenses and other credit card expenses over the years. They’ve got an older roof and will need to replace it in the next year or two.

After reviewing their income and providing consolidation options, we were able to consolidate $13,000 in debt and get them an additional $8,000 cash-out for their roof. We also reduced their outgoing monthly payments from $900 down to $600, with their roof money included.