Home Equity Loans: Four Ways Your Home’s Equity Can Work for You (Part 1)

For many homeowners, their home is their largest financial asset and, over time, the equity they’ve built can become a valuable financial resource. Accessing that equity doesn’t always mean refinancing your existing mortgage. Depending on your goals, a home equity loan may provide another way to access funds while leaving your current first mortgage in place.

In this two-part series, we’re sharing real examples of how our recent clients have used home equity loans to accomplish very different financial goals.

1) Using a Home Equity Loan to Start a Business

We recently had a client come to us who was seeking capital to start a new business. She was looking to borrow money to lease a building and build out the space, but the business loans she had explored had significantly higher interest rates than what she was expecting.

Luckily, she had significant equity in her home. We determined that by using a home equity loan, she could access the capital she needed while taking advantage of the lower rate available through a loan secured by her home. This allowed her to gain access to the funds she needed to launch her business without taking out a higher-cost business loan.

The takeaway: Home equity isn’t only useful for home improvements. For homeowners with sufficient equity and a sound financial plan, it may be an option for accessing capital to start a business or achieve another major financial goal.

2) Using a Home Equity Loan for an Equity Buyout

Our second client was facing a very different situation: divorce.

She and her ex-husband had an existing mortgage with a very low interest rate. She was keeping the home and as part of their divorce settlement, she needed to remove her ex-husband from the mortgage and buy out his portion of the home equity.

One option to achieve this would have been to refinance the existing mortgage into her name alone and, in the process, take cash out to pay the equity buyout. However, doing so would have meant replacing her existing low-rate mortgage with a larger mortgage at current market rates, which would have equated to at least a 3.5% rate bump.

Luckily, she was able to assume her existing mortgage from her current lender, allowing her to remove her ex-husband from that mortgage while preserving her favorable interest rate. She then used a home equity loan to obtain the $175,000 she needed to pay her ex-husband’s share of the equity.

The takeaway: In the right circumstances, a home equity loan can be used alongside an existing mortgage rather than replacing it. This can be especially valuable when a homeowner has a below-market interest rate they don’t want to give up.

Different Goals, Same Financial Tool

These two clients had completely different goals. One wanted to invest in a new business, while the other needed to navigate a major life transition. What they had in common was home equity and a need for financing that fits their specific circumstances.

A home equity loan isn’t necessarily the right solution for everyone, and there are important factors to consider, including the interest rate, loan terms, closing costs, monthly payment, and the fact that your home secures the loan.

However, it’s important to understand all your options before deciding whether to refinance, take out a home equity loan, or pursue another financing strategy. Whether you’re considering starting a business, navigating a major life change, funding a large expense, or simply wanting to understand what options are available, we’d be happy to have a personalized conversation about how you can make your home equity work for you.

Catch part two of this newsletter next week, where Margie will discuss two more examples of recent clients who used home equity loans to achieve their financial goals.