Mission renovation: Using your equity for home improvements

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July 5, 2019
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Owning a home can be extremely rewarding. But if you’re anything like most homeowners, you’ve also got a laundry list of home improvements and a to-do list that’s never-ending. One of the biggest advantages of homeownership is the equity you build in your home. The faster you pay your mortgage and build this equity, the better financial shape you’ll be in.

Whether it’s repairing a leaky roof or making your Pinterest kitchen become a reality, you can make your dreams come true by making your home equity work for you as a powerful financial tool.

Here’s a few tips to keep in mind.

Build equity faster

It’s as easy as it sounds! During the first few years that you make payments towards your home loan, most goes towards interest rather than the principal. The more you owe on the mortgage, the more interest you’ll pay.

“You can build up your equity faster by paying a little extra per month on your mortgage,” said Sean Murphy, Navy Federal Credit Union’s head of equity products. “Even paying just one extra mortgage payment per year, you’ll knock off interest to be charged, increase your equity and pay off the loan sooner.”

Know your options

Once you’ve gained equity in your home, you can use it. Your home’s equity is an asset that can be used to boost your borrowing power. Because it is collateralized, it usually has a better interest rate than an unsecured loan.

The most common options that allow you to use your equity is through a Home Equity Lines of Credit (HELOC) or Fixed Home Equity Loans. Both options use your home as collateral to provide credit for your needs.

HELOCs work a lot like credit cards. You’ll be approved for a specific amount of credit that represents the maximum amount you can borrow. This amount is determined by calculating how much your home is worth, the amount you owe on your home loan, and your credit history. You pay a variable interest rate and have a minimum payment due each month based on the amount of the credit line you’ve used. The loan terms of repayment can often be 10 years or more.

“Many of our members prefer the flexibility of a HELOC,” added Murphy. “Nearly half of the HELOC applications we receive are for home improvement.”

Another option for upgrading your house to the home of your dreams is through a fixed-rate home equity loan. This operates more like a traditional home loan where you get a specific amount of money based on the equity available in your home. There’s a set schedule to repay the loan, generally ranging from 5 years up to 20 years, and it offers a fixed interest rate.

Get all of the facts

Whatever your financial needs may be, making the best decision starts with understanding your options.

“The best advice I can give to a homeowner is to talk to your trusted financial institution,” said Murphy. “They’re the experts and they’ll be able to get you the detailed, most accurate information about the products offered. We encourage our members to ask us the tough questions so that we can help them make the best decision for them.”

Here’s a few helpful questions you’ll want to ask:

  • How much equity can I borrow?
  • Do I know exactly how much I want to borrow? Or do I need the flexibility of a HELOC?
  • How long are the loan terms?
  • How much will my monthly payment be?
  • What happens to the loan if I decide to sell my home?

Make sure you also look at how long you’ll want or need to repay the loan. The most important thing is for each person to look at their own circumstances. Take time to understand your needs and the overall impact on your budget.

“We meet our members where they want to be served,” said Murphy. “Some members prefer to read all of the information online, some prefer to talk to someone in the branch, and some prefer to call our 24/7 call center. Whatever questions they have about equity, we answer them in the channel the members prefer.”