How Does Home Equity Work?
Picture this: You got an incredible interest rate on your mortgage back in 2020. We are talking 2.5-3%. In 2020, your home was perfect. It was just the right size and provided everything you needed. Fast forward to now. Your home feels smaller or is in desperate need of an update.
Some homeowners decide this is when they need to move. Did you know there is another option? You can use your home’s equity that you have built up over the past few years to take out a loan. This loan gives you the financial flexibility to turn your home back into the dream home it was several years ago. Here’s how.
What Is Equity?
Your home’s value didn’t stay stop in place once you moved in. It either lost or gained value - more than likely gained! Home equity is the value of a mortgaged property after deduction of charges against it. Essentially, equity is your home’s current market value minus the mortgage and any liens. Your home’s value is an estimate of what the potential purchase price of your home if it went on the market. Assessments of recently sold properties similar to your home factor into this.
Your Home’s Market Value – Mortgage (including liens) = Your Home’s Equity
For example, if your home’s value is $300,000 and you owe $230,000 on your mortgage with no other liens, then you have $70,000 in equity. This borrowing power gives you the funds you need to make home improvements!
How Does It Work?
1. Determine Your Home Improvement Projects
Home improvement projects can help with structural projects, such as taking down interior walls, adding onto the house, or making crucial fixes. It also can give you the necessary funding to update your home. You may not need anything structural done, but maybe the whole house is stuck in the 1970s with fuzzy carpets, wood paneling, and eccentric colors.
While most of it is cosmetic, these projects can add up fast. Replacing old shag carpet can run you up to $5,000 automatically, and you can’t leave the rest of the place in the past. Having a home equity loan can help you get all the projects done at once and make the necessary upgrades.
Before you apply for the loan, get some quotes for how much the projects will cost so you can borrow what you need.
2. Apply For A Home Equity Loan
Ready to start those projects? Then, it is time to apply for a home equity loan. You start this process by picking the financial institution that has the best rate and term for you. Once you do, you will submit an application through them. From there, the financial institution’s home equity lenders will review your application. To approve your loan, they will look at:
- Your credit score – most lenders require at least a 660
- Employment history
- Current income
- Debt to income ratio
- Your home’s equity
It depends on your lender, but it can take two weeks up to two months to gather all the documentation, go through the underwriting process, getting your house appraised, and the time of closing. So, keep that in mind before you start the process.
3. Get Approved!
Once you get approved, your lender will loan you the amount you applied for in one lump sum or send a direct check to the applicable merchants (whoever you hired to get the job done). If you receive a lump sum, you can start searching for contractors, or your financial institution may have asked you to already search so they know where to send the check.
Keep making memories in the same home, but bring back that “new home” feel!