Home Equity: What You Need to Know

Rearview shot of a young African American couple standing outside their new modern, two story gray and white homeHome Equity: What Is It and How to Use It?

What is Home Equity?

With the recent spike in real estate values, I often have customers ask about their home equity and how to use it. First, what is home equity? It is the difference between the current market value of your home and the outstanding balance on your mortgage.

Each owner has different reasons for wanting to utilize their equity. To illustrate, a homeowner may use equity to make home improvements, pay off debt, or pay for a college education. The lender will limit the amount you can borrow. For instance, the amount is based on the type of property you own, the loan amount, lending guidelines, and various state laws. For example, you can borrow more against a primary home than an investment property.

Home Equity Versus Other Loan Options?

Different loan products can also deliver the same results depending on your goals. For example, if you want to use home equity to remodel your kitchen, perhaps a home improvement loan is a better solution because of state laws or delivering a better rate.

Another example may be for small amounts. Perhaps you need only $10K, and your rate is already low. We may want to think of a 2nd loan. That may save you closing costs.

Finally, as one can guess, the lending guidelines become more restrictive when you want the money back out. Borrowers need higher credit scores, rates can be higher than a rate/term refinance, and the lender may require more reserves in the bank.

For You Texans!

Texas is special. Texas is different. Thus, Texas has unique laws regarding home equity.

Technically, this is called a Texas 50(a)6 transaction. Furthermore, due to Texas’ Homestead Laws, the maximum amount of home equity is limited to 80% of the home’s value. Additionally, once a borrower enacts a cash-out refinance, your property will always have this nomenclature until you sell it or pay off the lien. A borrower may refinance only once per year.

It’s essential to consult your financial advisor. Also, feel free to contact me for a complimentary and confidential consultation to answer any questions.

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