Home equity represents the portion of your home that you truly own, calculated as the difference between your home’s market value and the outstanding balance on your mortgage. There are different ways to leverage your home’s equity. You could open a Home Equity Line of Credit (HELOC), which is an open and revolving line of credit borrowed against your home’s equity as collateral. You could also do a cash-out refinance mortgage, which lets you refinance your home while getting some or all of the value of your equity in cash. Some take out a second mortgage against their home equity with the home as collateral while the original mortgage is still in effect. No matter which method a borrower uses, leveraging home equity can be a powerful financial tool. It’s important to know the pros and cons of doing so.

Pros of Home Equity

1. Access to Funds

   Perhaps the main reason people consider tapping into their home’s equity is to gain access to a substantial source of funds for major expenses such as financing home repairs or medical expenses.

2. Lower Interest Rates

   Using home equity as collateral for borrowed money could be an attractive alternative to credit cards or unsecured loans. The possibility of lower interest rates could make them a cost-effective borrowing solution.

3. Tax Benefits

   Interest paid on home equity loans or loans of credit may be tax-deductible if the funds are used for home improvements. Be sure to check with a tax expert to understand how IRS regulations may affect your situation.

4. Increased Home Value

   Using the funds made available by tapping into home equity could increase the overall value of your home through a remodel, additions or improvements. Reinvestment in your home could benefit you with a positive return in the long run.

5. Debt Consolidation

   Home equity can be used to consolidate high-interest debt, such as credit card balances, into a single lower payment, simplifying your finances and helping improve your cash flow and flexibility.

Cons of Home Equity

1. Closing Costs

   Refinancing comes with costs and fees, including closing costs. These costs could offset any savings you might be trying to get from a lower interest rate. You should carefully consider whether the costs of tapping into your equity are worth the benefits.

2. Potential for Higher Interest Rates

   HELOCs and home equity loans may come with variable interest or higher interest. If you have a low interest rate locked in, you might end up paying more interest over the life of your loan if you change your loan terms through a refinance.

3. Impact on Credit Score:

   Taking out a home equity loan or line of credit requires a hard inquiry on your credit report, which could lower your credit score. Increasing your overall debt could also negatively affect your credit score.

4. Risk of Foreclosure

   Borrowing against your home equity puts your property at risk. If you fail to make payments on a home equity loan or line of credit, you could face foreclosure.

Remember, home equity can be a valuable financial resource, but you should carefully consider the risks before making a big decision. If you’re considering a HELOC, we can help! Our experts can evaluate your situation and help you decide if a HELOC or other solution may be right for you. Meet with a banker to discuss your options today!

Sources:

https://www.forbes.com/advisor/home-equity/home-equity-loan-pros-cons/

https://www.cnbc.com/select/what-is-a-home-equity-line-of-credit/

This article is provided as a free service to you and is for general informational purposes only. Cadence Bank makes no representations or warranties as to the accuracy, completeness or timeliness of the content in the article. The article is not intended to provide legal, accounting or tax advice and should not be relied upon for such purposes.