Using Your Home Equity in a Cash Crunch

August 24, 2023

Since the pandemic, most homeowners have seen an increase in the value of their real estate. While not always the first and best option to utilize, a home equity loan can provide cash promptly. Planning and having an emergency fund or money available is optimal, but life can throw us curve balls.

There are a couple of ways to access equity in their home. First, a home equity loan is a lump sum you borrow against your property. Total equity in your real estate is the current value minus the outstanding mortgage owed. In general, most lenders will allow someone to borrow 75-85% of the home’s value, less anything owed on the mortgage. When taking a home equity loan, you are setting up a second mortgage where payments over some period will be predetermined at a fixed interest rate.

The second option is a home equity line of credit or HELOC. The borrowing parameters are similar to the home equity loan relative to how much a lender will approve. However, a HELOC allows one to periodically access money over time (typically ten years) if and when needed. Another difference is that the HELOC’s interest rate will vary over time versus being fixed. Sometimes, people may apply for a line of credit without an immediate cash need. This allows them to have a backstop and be ready if an unexpected need arises.

A home equity loan and a line of credit were traditionally used to improve one’s home, but the reality is that they can be used for anything. The loan option generally could be more appropriate if a significant one-time expense needs to be covered. The line of credit option may be better if several more minor expenses one anticipates will come up over several years. If exploring one of these options may make sense, speak with a few different banks/lenders to shop around. Interest rates, along with any fees and closing costs, can vary. Also, consider how the monthly payback will affect your current budget and cash flow since both are loans and need to be paid back over time.