Return to Money Know-How
WTFinance is a home equity loan and how does it work?
By Miranda Marquit
Published on April 10, 2023
Read time: 3 min
We’re always being told that a home is a major asset. And in a lot of ways, that’s true. When I owned a home, it was the most valuable thing I owned.
But you can’t really spend your house. Value isn’t the same thing as money.
At least that’s what I thought until I learned about home equity loans. I didn’t realize a home equity loan is a way to turn your home’s equity into spendable money.
If you’re like me, hoping to figure out how to access that locked-up equity so that you can tackle your financial goals, a home equity loan may be the key. Let’s take a look at how a home equity loan works.
What is a home equity loan?
A home equity loan is designed to let you turn your equity into cash. You typically build up equity by making mortgage payments and when your home’s market value increases.
How is home equity calculated?
Your home equity is the difference between your home’s value and the amount you still owe on your mortgage.
For example, let’s say your home is worth $400,000 today and you still owe $225,000 on your mortgage. Your equity is $400,000 minus $225,000, or $175,000. As a percentage, that’s about 44% in equity.
How can you use a home equity loan?
One thing I learned from getting a home equity loan is that it can be used for just about anything. It’s a way to help you reach financial goals by letting you tap into what’s probably your biggest asset.
Make renovations to your home
Whether you want to update your kitchen or install your dream patio, a home equity loan might be able to help. You can use the cash to pay for upgrades that make your home more comfortable. I used my home equity loan to update the flooring in my home.
Address home maintenance issues
Anyone who’s loved a home knows that it needs ongoing maintenance. From the appliances to the roof, you might need ready cash to make repairs or replacements. These are things your home insurance might not cover, so a home equity loan could get you the cash you need to keep your house in tip-top shape.
Pay down high-interest debt
It’s not just about upgrading and maintaining your home. A home equity loan can also help you with other financial goals, like getting rid of other debts.
Home equity loans tend to have lower interest rates compared to other kinds of debts, like credit cards and personal loans. You might be able to lower the overall cost of your debts by paying them off with a home equity loan. Some of the benefits you might get include:
Replace multiple bills with one payment, streamlining your approach to debt paydown.
Make a single monthly payment that’s lower than the total of your monthly payments now.
Save money on interest, thanks to potentially lower rates.
If you get a lower interest rate but keep making the same payment, you could get out of debt faster.
With the help of a home equity loan, you could have the chance to move forward with your home and your life.
What would you do if money wasn’t holding you back?