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Unlocking Your Home's Equity

Home ownership has benefits. One of those benefits is the ability to use the equity you've built for other financial needs such as home improvements. A home equity loan can also be used for various financial needs such as repairs, debt consolidation, vacations, or college expenses.

There is a specific difference between a home equity loan and a home equity line of credit, or HELOC. A HELOC is a line of revolving credit with an adjustable interest rate whereas a home equity loan is issued as a one-time lump sum, often with a fixed interest rate.

While not for everyone, a HELOC can unlock your home's potential or provide quick, low-interest cash for other expenses. Home equities tend to have lower rates than other loans because the value you've built in your home acts as security.

The process is simple.

man with drillContact your lender to determine what options are available. As part of the application process, a lender reviews the current appraisal value of your home versus what you owe. Most will lend anywhere between 80 to 100 percent of that equity, depending on a number of factors including credit score.

Let's assume your home is appraised at $150,000 and your lender gives you 80 percent of the value of your home less what is owed on your first mortgage. You currently owe a first mortgage of $80,000. That would give you a home equity line of credit for up to $40,000.

The average price of several mid-range renovations shows that our example HELOC of $40,000 could do a lot of work. According to data from Remodeling magazine, you might expect to pay a professional about:

  • $11,000 to install new windows or siding
  • $16,000 to upgrade the bathroom
  • $19,000 for a minor kitchen makeover
  • $20,000 to replace the roof

Compare those sample averages to the estimated resale value and you're looking at a 40 to 50 percent return on investment: Not a bad idea whether you're sticking around or plan to sell in a few years.

Whatever you might need the money for, it pays to investigate the value of your home and the opportunities equity can offer.

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