Home Equity 101

By Ken Brossman, District Manager – La Crosse, Marine Credit Union

Home equity is the difference between how much your home is worth and how much you owe on the mortgage (or mortgages, if you have a home equity loan or HELOC).

Let’s look at an example:

The day you purchase your home Five years after you purchase your home
Purchase price = $180,000 – ($18K down payment)

Original mortgage amount = $162,000

Home equity = $18,000

Appreciated home value = $200,000

Mortgage balance = $145,000

Home equity = $55,000

Home Equity SmallAs you can see, the property’s equity increases as you make payments on your mortgage and the home appreciates in value.

You’ve earned that equity, so it is yours to use. A home equity loan or HELOC (home equity line of credit) allows you to borrow money and use your home’s equity as collateral. A home equity loan or line of credit can be used for a multitude of reasons including the following.

  1. Consolidation – Paying off your other debt to reduce the interest and payments.
  2. Home improvement projects – In the example above, 5 years into paying off your mortgage, you could take out a home equity loan to renovate your kitchen.
  3. Emergency fund – Having a home equity line credit available, prepares you for a major home repair, an accident or medical bills. A nice feature of the HELOC is that if you don’t carry a balance, you don’t a have payment due monthly, but still have the security of the line of credit being available in case of an emergency.
  4. Education expenses – Home equity loans and lines can be used for educational expenses for you or your family.
  5. Tax Advantages – Home equity can be a great way to take advantage of potential tax advantages. Make sure to consult your tax professional to see if this would be a benefit that you may be able to benefit from.

Home equity loans or HELOCs can have significantly lower interest rates and lower payment amounts than other loans, so when considering taking out your next loan, see if this may be an option for you!

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