Posted: 1 Jun '23

How to Effectively Use a Home Equity Mortgage Loan

How to Effectively Use a Home Equity Mortgage Loan

A home equity mortgage loan allows you to tap into the equity in your property. Most homeowners prefer home equity loans since they are flexible with lower interest rates. To secure a home equity mortgage loan, most banks and other lending institutions require that you have enough equity, a good credit score, and a reliable source of income.

Before we look at the many ways you can spend your home equity mortgage loan, let us first discuss the main types available in the market. Ideally, each type has pros and cons, and you need to understand your needs before picking one. Call us today to learn more.

Types of Home Equity Mortgage Loans 

There are three main types of home equity loans designed to meet the unique needs of each borrower. These loan products vary in terms of the repayment schedule, rates, terms, and more. We have discussed them below:

  • Fixed-rate home equity loan. With this loan type, the lender offers a lump sum amount with a fixed interest rate, usually 5 to 15 years. This loan type is ideal for homeowners who need quick cash for a one-time spend, such as expanding a business, home renovation, settling a medical bill, etc. 
  • HELOC (Home equity line of credit). HELOC differs from a fixed-rate loan since it is paid in bits with the loan amount capped at a given value. It also has a draw period (usually ten years), after which you must have repaid all the interest and principal amount. The repayment period lapses a couple of years after the draw period ends. It’s worth noting that the rates of a HELOC fluctuate depending on the market conditions. This loan is ideal for people who want the flexibility to settle their bills on the go. 
  • Cash-out refinance. With a cash-out refinance, you are taking on a larger loan against your home equity to repay the existing mortgage, then cashing out the remaining amount. Most homeowners go for a cash-out refinance to secure a lower interest rate or decrease/increase the mortgage term to suit their current and future needs. You can also choose a cash-out to refinance if you want to pay off all your other loans while still getting some cash to settle your bills.  

Ways to Spend Your Home Equity Mortgage Loans 

Now that you know the different types of home equity mortgage loans, let us look at the common and most prudent ways to use these loans:  

  • Consolidate debt. Paying off high-interest loans is one of the best use cases of home equity loans.
  • Run home improvement and renovation projects. Taking on a loan to run repairs and renovation projects will ultimately improve your home value. This is a good use of a home equity loan.
  • Expand a business. There’s a big difference between starting a business and expanding an existing one. It’s always less risky to borrow a loan to expand a business than to start one. 
  • Pay medical bills. Health and well-being are always a priority. A home equity loan is worth it if you have unsettled medical bills. 
  • Make key purchases. If you want to invest in something you are sure will pay back later or will cut your monthly expenditure, such as a business inventory, etc., a home equity loan will have you covered. 
  • Pay for tuition. Education is a worthwhile investment that will pay back in different ways. 

If you can control your risk appetite and have reliable income sources, you can also use home equity mortgage loans to fund other expenses. These include paying for important life celebrations, starting a business, funding investments, etc. 

Make it Work for You

Since everybody’s needs are different, what you consider an ideal use of the loan could be different for the other person. So, always focus on your current and future needs and ensure you have a strategy for repaying the loan. Always do your homework to ensure you are choosing a reputed and trustworthy lender. Call BMC Mortgage & Investments today to discuss your options!