A home equity loan lets you convert your equity into cash. You can borrow between 80 and 90 percent of your home’s value, minus what you owe on the mortgage. So if your home is worth $395,000 and you owe $275,000 on your mortgage, you could qualify for a home equity loan between $41,000 ($395,000 * .80 – $275,000) and $80,500 ($395,000 * .90 – $275,000).
Funds are dispersed in a lump-sum and payable in equal monthly installments over a set period. Plus, the interest rate is fixed, so you won’t have to worry about fluctuating monthly payments.
But is a home equity loan a good idea? Read on to learn more about the benefits and drawbacks of home equity loans and a debt-free alternative to tap into your home’s equity.
Access Your Home Equity
Home Equity Loans Pros and Cons
Here are some key benefits and drawbacks of home equity loans:
Home Equity Loan Pros
- You won’t have to refinance your current mortgage. If you secured a low-interest rate when you purchased your home, it would remain intact.
- The fixed interest rate makes it easier to budget for monthly payments as the amount won’t change over time.
- The extended repayment period makes the monthly payments affordable. Some lenders offer up to 20 years repayment terms in home equity loan proceeds.
- You can possibly deduct interest paid on the loan if the proceeds are used for home improvements. In most instances, this amount is limited to $100,000. It’s best to consult with a licensed tax professional to learn more.
- The interest rate is generally lower than what you’ll find with other credit card and loan products.
Home Equity Loan Cons
- You need good to excellent credit to qualify. Homeowners with credit scores of 620 or lower could be denied.
- You likely won’t be eligible if you have little to no equity in your home.
- You could lose your home if you fall behind on payments since it’s used as collateral.
- Interest is assessed on the entire loan amount from day one, even if you don’t use all the loan proceeds right away.
- You’ll have to pay the entire outstanding balance at once if you sell your home. Most homeowners use proceeds earned from the sale to cover the balance. But if there’s a shortfall, you will pay the difference out of pocket for the transaction to close.
Is a Home Equity Loan a Good Idea?
It depends on your financial health and how you plan to use the funds. But be mindful that with a home equity loan or a home equity line of credit (HELOC), you’ll essentially be putting your home on the line. Plus, you’ll be adding to your current debt load. So it’s pertinent to ensure you’re making an informed decision.
When A Home Equity Loan May Be a Good Idea
A home equity loan may be a good idea if you’re looking to eliminate high-interest debts or meet other financial goals. Many homeowners also use these loan products to make costly improvements to their homes.
However, you should have a stable income to make payments on the loan comfortably. It’s equally important that you follow a spending plan each month to avoid overspending. And you want a safety net that can be used as a last resort if you experience financial hardship to ensure you can stay current on your payments.
When You Should Consider Other Options
Are you eager to pull the equity out of your home but don’t quite have a plan for how the funds will be used? You may want to hold off or consider other options. Furthermore, a home equity loan likely isn’t a smart financial move if your income is shaky and you have trouble staying afloat financially.
If you have a decent credit score and need fast cash, an unsecured personal loan could be a better deal. Or you could explore credit cards that offer promotional annual percentage rate (APR) periods if you need access to funds and can repay what you borrow before the promotional window ends.
Ultimately, a home equity loan can be risky without a solid plan for how the loan proceeds will be used. So, you’re better off thinking this through before applying for a secured loan that uses your home as collateral.
Access Your Home Equity
Home Co-Investment: An Alternative to Home Equity Loans
A home equity loan could seem like a viable option, but maybe you would rather not take on more debt. Fortunately, there’s another solution to get the equity out of your home.
Meet Unison— an innovative company that offers home co-investments with no added debt or monthly payments. Instead, you will get a lump sum of cash now in exchange for a share in the future change in the value of your home.
You’ll have up to 30 years to use the cash how you see fit, for example, to fund home improvement projects or renovations. Some homeowners make home improvements – others pay off debt, meet other financial goals, beef up their nest egg or invest the funds to build wealth.
With a home co-investment, you’ll retain ownership of your home during the contractual period. This means you will continue to enjoy all the perks homeownership has to offer, like federal income-tax deductions for mortgage interest and property tax payments.
At the end of the 30-year term, you can either sell your home or buy Unison out if you wish to stay in the property. Either way, Unison will be entitled to the original co-investment amount plus their share of the increase or decrease in value. (Quick note: Unison will not share in losses if you sell your home in the first five years of the agreement or if you buy out the agreement before the end of the 30-year term).
Ready to get started? Below is a step-by-step breakdown of how to determine your eligibility and possibly secure a co-investment from Unison:
- Step 1: Submit an online inquiry to see if you’re pre-qualified. It only takes a few minutes and won’t hurt your credit score.
- Step 2: If you’re pre-qualified, complete the online application or call Unison directly to get started by phone.
- Step 3: A representative from Unison will work with you to get an appraisal of your home scheduled and completed if you’re credit-approved for a co-investment.
- Step 4: If approved, you will receive the offer letter and closing package to review and sign. Address any questions or concerns with the Unison team, and sign the required documents to seal the deal.
- Step 5: Receive your co-investment in as little as three days after closing.
Don’t let your finances hold you back. Instead, start living life on your terms and make your home equity work for you with a Unison co-investment.