VIDEO: Utilizing Home Equity

Jason Carter By Jason Carter

There are many benefits that come from being a home owner, and one of the biggest is the ability to utilize the equity in your home. Over time, home equity increases and that investment can be used in a variety of ways.

In order to utilize the equity in your home, you will have to refinance based on its current appraised value. Once that value has been established, up to an 85 percent loan-to-value ratio is available for refinancing. For example, if you have an appraised value of $300,000, you are eligible to borrow up to $255,000, providing that you don’t owe anything on the home. If you do have a principle balance remaining on your loan, your borrowing capacity would reflect that amount. For instance, if you owed $100,000 on the previous example, you would have access to $155,000 of equity. As with any other refinance, the total amount received would have the closing costs and prepaid items held out, which would leave roughly $150,000 to do with what you choose.

Common uses for home equity include:

  • Funding home repairs, upgrades and additions
  • Purchasing a new car
  • Paying for kid’s college
  • Investing in rental property

Keep in mind that the benchmark of value for the loan is going to be the amount that the property appraises for. If you keep your loan-to-value ratio below 75 percent, you’re more likely to receive a better interest rate. Once you get to a loan-to-value ratio that is above 75 percent, every five percent increment you increase will be a slight penalty to the interest rate. The home mortgage business works in increments of five, so be sure the amount you borrow is based upon your needs and not on the total amount available.

While there are many benefits to utilizing home equity, it’s important to note that your monthly mortgage payment will likely increase due to the added principle balance. However, mortgage interest on your primary residence is tax deductible, which means the new loan will increase the amount of interest that you can write off on your taxes, which can sometimes make a difference. Before making any big decisions regarding your home equity, speak to a knowledgeable loan officer who can help you determine what will work best for your situation.