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When to Apply for a Home Equity Loan

Building equity is one of the most significant financial benefits associated with home ownership. You generally begin establishing equity when you make your purchase as the down payment becomes equity. Equity accumulates with each mortgage payment you make as well as with property value appreciation. As a homeowner, you may keep a close eye on your equity growth, and you may take pride in watching equity increase over time. At some point, many homeowners wonder if they should tap into their equity to achieve specific goals. After all, this can be a large sum of money, and you may have various plans for its use. Before you apply for a home equity loan, consider if now is the ideal time to do so.

When You Have Sufficient Equity

You may have a substantial amount of equity available in your home, but you may not have enough to access a sizable amount of money. Purchase loans may allow you to finance up to 95 percent or more of your home’s value, but refinance loans are different. Most lenders require homeowners to keep a significant amount of equity in the home when refinancing. With this in mind, it is uncommon to find a refinance or equity loan for more than 75 or 80 percent of the current value of the home. Determine the home’s current value, and multiply this figure by 75 or 80 percent. Then, subtract the current lien balances. The remaining balance is the amount you can access through a home equity loan, if you qualify for the loan.

When You Will Benefit Financially

Even if you have sufficient equity available in the home, it may not always be advantageous to use these funds. Equity is a financial asset, and it is wise to only use it to benefit you in a financial way. For example, renovating the house with equity can build additional equity. This benefits your net worth. On the other hand, using the equity to pay for the kids’ education or to take a once in a lifetime trip may sound like good plans. However, they do nothing to affect your net worth. By using the funds for these purposes, you are decreasing your net worth substantially. There are other ways to fund a child’s education or to pay for a great vacation.

When Your Budget Can Support It

A home equity loan is a long-term debt that may be in place for several decades. It is critical that you review your current budget to ensure that you can afford the new loan payment. More than that, it is also important to consider how this debt will impact your long-term financial goals. In many cases, the addition of a new debt means that you will not be able to save as much money or pay off credit card debt as quickly. Ensure that the financial benefits that you enjoy from the loan are worth the negative impact that the new debt will have on your budget.

Equity can be a considerable financial asset, and a home equity loan allows you to re-position or access that asset. Take time to thoroughly review each of these points to make a wise decision about how and when to use your equity.