Have you ever sat on your couch on a quiet night, swirled your merlot, and looked at your house like, what a waste I can’t use this equity right now to pay off current unsecured debt in order to improve my long-term financial situation.
Well, think about it now. Your home is typically your biggest asset, and if you have equity you might be able to use it to pay off debt. They key to making this work is knowing three things.
- Decide how much you need.
- Confirm how much you currently owe.
- Figure out how your current interest rate compares to today’s interest rates.
There are two options for using home equity and your answers for the above questions decide which one will be a good fit.
When refinancing your mortgage, you take a loan of a specific sum out from the equity of your home. If interest is at least half a point higher than current rates, refinancing makes a lot of sense. Also, if interest rates are about the same it might not be worth it. Keep in mind, closing costs are about $3,000, so depending on how much you need to borrow the fee might eliminate this option.
A Home equity line of credit works like a credit card, drawing on your home equity as you pay it back. Home equity line of credits don’t have closing costs. But, the interest rate is adjustable and will probably trend upwards as interest rates have been rising.
Used smartly, your home can be a great tool in your long-term financial plan.
Photo by Cody Hughes @clhughes21