How Do I Use My Home Equity?

Have some bigger projects coming up or thinking about consolidating debt?

Using your home equity could be a good fit. But what does that look like and when is it the right call?

We sat down with one of our home equity experts, Sarah Menihan, to get the ins and outs of how to use your home equity.

Am I in a good financial position to use my home equity?

Before you can tap into the equity of your home, you first need to qualify.

At minimum, you need:

• At least $5,000 of equity
• A positive credit history

"At UW Credit Union, home equity loans and lines of credit are much less dependent on credit scores, and rely more on an individual's credit history," says Sarah Menihan, Vice President of Consumer Lending. "It's important that you're able to make your regular loan payments on a consistent basis."

Your debt-to-income ratio, the percentage of your monthly income used to pay for monthly debt payments, is also a major criterion for loan approval. Generally, the lower your debt-to-income ratio, the better your chances of getting a loan.

I've qualified for a home equity loan. Now what?

A good indicator of whether you should consider tapping into your home equity is your loan-to-value (LTV) ratio.

The lower your LTV, the better your interest rate, and the more protected you are from fluctuations in the housing market and the possibility of owing more than your home is worth.

Understand your options

There are two primary options to consider: a home equity loan or a home equity line of credit (HELOC).

Home equity loans come as a single, large sum of cash and often have fixed interest rates, which gives you a clear picture of how much you owe every month. "Home equity loans are great for large expenditures where you know the total cost up front, like a single home renovation project, a wedding, or consolidation of high-interest debt," says Menihan.

UW Credit Union offers 5-, 10-, and 15-year options* with competitively low rates.

HELOCs work similarly to credit cards:

• They have variable interest rates.
• You can withdraw funds when you need them (up to your credit limit).
• You only pay interest on the funds you use.

"HELOCs are best used for funding intermittent needs like ongoing home projects, college tuition, or as an emergency fund," notes Menihan.

Unlike home equity loans, HELOCs are split into two periods:

• The draw period — typically five years; you can withdraw funds and pay interest only on what you take out.
• The repayment period — you no longer withdraw funds and your payments will be higher, because they include both principal and interest.

Is using my home's equity the right move?

If you're using a home equity loan or line to:

• Consolidate high-interest credit card debt
• Pay for emergency medical expenses
• Increase the value of your home

It could be the right move.

"If you're planning on a big remodeling project, make sure it's a project that's going to increase the value of your home, and only work with reputable contractors," advises Menihan.

Even though home equity loans and lines of credit offer a quick, efficient way to get large sums of money, they're still a loan on your house. Defaulting on a home equity loan or line of credit could result in the loss of your home.

That's why it's important to carefully evaluate if you can comfortably handle monthly loan payments. With a HELOC, plan ahead for the repayment phase by understanding how much your combined principal and interest payments will be.

"If it looks like variable rates may rise and remain higher over a longer period of time, members can convert their HELOCs into fixed-rate home equity loans¹, which can help them save over the long term," says Menihan.

UW Credit Union offers great rates, a variety of terms, plus no annual fees and low closing costs² on HELOCs or home equity loans. You can apply online quickly and easily!

What if it's not a good time or fit?

"If you only need a small amount of money, or if you have some credit card debt you really want to attack, personal loans or credit card balance transfers can be great options," advises Menihan.

While they'll have higher interest rates, these options still provide flexibility to borrow what you need when you need it.

Still deciding if using your home equity is right for you?

Home equity loans and HELOCs can be a useful financial tool for many homeowners.

However, it's a big decision that requires careful planning and consideration. It's helpful to talk to someone who puts you and your financial well-being first.

Get in touch with one of our home equity experts or schedule an appointment today. We’ll work together to determine if using your home equity is the right move for you.