Jan 17, 2020
By Mariclare Cranston, Content Specialist

Using your Home’s Equity for a Major Purchase

Whether you are finally ready to get that RV and drive across the country, or you are facing unexpected medical bills, determining how to pay for major expenses can be stressful. Fortunately, you may be able to put your home’s equity to work for you.

What kinds of purchases can I use my home’s equity for?

The money you can receive from a Home Equity Loan or Home Equity Line of Credit (HELOC) can be used for just about anything. From financing home improvements to paying for tuition, your home’s equity is a valuable asset. You can use the funds from your loan or line to pay for:

  • Medical expenses
  • Emergency home repairs
  • Home improvements
  • Vacation
  • Education expenses
  • Anything else!

Watch our brief video to see how you can put your home’s equity to use!

Is a Home Equity Loan or a HELOC a better option?

Both a Home Equity Loan and a HELOC are good solutions for financing a major purchase. Because both options use your home as collateral, you will be able to borrow more than you typically can with a Personal Loan. Both Home Equity Loans and HELOCs typically carry a lower interest rate than other funding options, including Credit Cards or Personal Loans. This is important because the lower the interest rate, the less money you are spending on interest charges.

Determining which is a better option, though, depends on your individual and long-term needs. There are pros and cons to both so it’s important to really look at your whole financial picture before deciding.
If you want to be able to access funds to help finance your purchase, but still have money left over, a HELOC may be a better option for you. Because HELOCs allow you to draw money as needed, you can advance a sum for your expense and still have the line available for future emergencies or large expenses. You only have monthly payments if you use your HELOC, and often those payments are interest-only during the draw period. HELOCs require some discipline; it’s important to resist the temptation to use it for miscellaneous expenses.

A Home Equity Loan might be a more attractive option if you simply need a larger lump sum. With this option, you will receive all of the money upfront, allowing you to cover your expense. Because you receive a lump sum, though, be sure to calculate all aspects of your purchase that you will need to cover before applying for your Home Equity Loan. You may want to set up a separate savings account to keep that money separate and earmarked solely for your purchase.

Use our home equity loan payment calculator to estimate your monthly payment.

How do I prepare for my purchase?

There are a few things you can do to prepare for making your major purchase and to help you make it as cost-effective as possible.

  1. Build and protect your credit. One of the most critical factors a financial institution will look at before approving you for a Home Equity Loan or a HELOC is your credit score. The better your score, the more likely you are to be approved at a favorable interest rate. Before you apply, you should get your free credit report and score. Check your credit report – from all three bureaus – thoroughly to ensure there are no errors. If your credit isn’t as good as it can be, and you can hold off on making your purchase, you may want to work on improving your score before you apply. Our free guide to Using Credit Wisely offers more tips and guidance for protecting your credit.
  2. Determine how much you can afford. If you are planning to make a major purchase, you’ll want to examine your budget to determine what a comfortable monthly payment might be. If your purchase is an emergency one, work with your financial institution to come up with an amount that you can afford.
  3. Shop around. A major purchase is just that, a large financial investment. Research companies who sell what you need, and don’t be afraid to ask about discounts. Look for affordable quality; keep in mind that the most expensive option isn’t necessarily the best option. If you’re facing an emergency purchase, work with the vendor or medical office to come up with a manageable payment plan.

Download our free Budget Tool
to help you plan for your purchase!

download our budget sheet

Do I qualify for a Home Equity Loan or HELOC?

Lenders will often look, at the very least, at your credit score and your debt-to-income ratio (DTI) before deciding to lend to you. Your credit score is a mathematical analysis of how likely you are to repay your loan on time. Your score factors in things like how many loans or credit cards you have, how well you pay your bills on time, how much of your available credit you’ve used and how old your oldest credit or loan account is. All of these factors are weighted and combined to assign you a score. It is very important to have a good understanding of what your credit score is before you begin the process of applying for a home equity loan. If your score isn’t high enough, there are steps you can take to work on improving it

DTI measures how much debt you currently have relative to your income. A DTI that is too high suggests you may be spread too financially thin to be able to make the payments on your home equity loan. Even if you have a good credit score, a high DTI can cause some lenders to deny your application. Using a monthly budget tool is a great way to manage your finances and keep your debt at a manageable level.

For more information on understanding your credit, watch our brief explainer video here. 

Using your home’s equity needs to be a well-thought-out decision, but when faced with large or unexpected expenses, it can be the solution you need.

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