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Bottom Line Up Front

  • Paying down your mortgage creates home equity, which you can access to fund large purchases.
  • Home equity loans and lines of credit are 2 ways to use your home’s equity. 
  • Home equity can be great for funding many large expenses and/or consolidating debt. 

Time to Read

4 minutes

August 23, 2022

As a homeowner, you can think of your home as a resource for future financial security. Each month’s mortgage payment could build up your equity a little more. Best of all, you may be able to access that equity should you need it—whether you want to improve your home or fund other important purchases. Home equity loans or lines of credit provide the key.

Home Equity Basics

There are several ways to access your equity. Two of the most common are: home equity loans and home equity lines of credit.

  • A home equity loan involves borrowing a percentage of your equity in a lump sum that’s typically paid back in fixed monthly installments over a set period of time. These types of loans are attractive because they may offer lower rates than credit cards or unsecured loans.
  • A home equity line of credit (also called a HELOC) is more like a credit card. The difference, however, is that a HELOC is secured debt (debt that’s backed by collateral) and a credit card is unsecured (debt that isn’t backed by collateral). With a HELOC, you’ll be approved for a maximum amount that you can draw from to make purchases. Be advised, though, HELOCs often have a variable rate.

In both cases, it’s important to keep in mind that you’re pledging your home in exchange for the loan or line of credit, putting it at risk if you spend more than you can afford to pay back.

At Navy Federal Credit Union, you can access your funds online, by writing a check, by visiting a branch or by using your Home Equity Line Platinum credit card. You’ll pay back what you use plus interest.

When It’s a Good Idea—and When It’s Not

Home improvements. Renovations are among the most common uses of home equity loans or lines of credit. Theoretically, such improvements may increase the value of your home, which could increase your equity further once the loan is repaid. However, keep in mind that not all improvements boost your home value and market prices can fall—erasing the value of your improvements.

College education. Home equity can be a way to borrow for college, as the interest rate may be lower than private student loans and the maximum loan amount higher. A line of credit may be particularly useful for parents whose children are a few years apart—they can use the money for tuition and pay down the balance in time for the next child to enter college.

Paying off debt. Consolidating higher-interest debt from credit cards, car loans and other personal loans is another use of home equity. To put it simply, you’re shifting the debt from assorted credit cards or loans, with varying due dates, to a single lender with an established repayment plan and a lower interest rate. Although this option can lower monthly payments when your debt is bundled together, it’s important that you make the monthly payments on time and in full. Otherwise, you may be putting your home at risk of foreclosure. This option is best for disciplined borrowers. If you’re considering taking this route, try using our debt consolidation calculator to see if it’s right for you.

Buying a car. An auto loan is usually a better choice than a home equity loan or line of credit. Interest rates tend to be similar or lower, and they usually require little paperwork and fewer fees.

Going on vacation. It’s far better to save for near-term wants like vacations or a large-screen TV than to use your equity for something that offers no financial return.

If your mortgage is with Navy Federal and you’re considering using your home’s equity to accomplish one of your goals, visit our Home Equity page or giving us a call at 1-877-573-2324, extension 2, weekdays from 8 am to 6 pm, Eastern Time. We’re here to help you use what you have to get what you want.

Home Equity Terms

Equity: Current appraised value of your home minus the amount you have left on your mortgage(s).

Home equity loan: A lump sum of money that’s typically paid back in fixed monthly installments over a fixed period of time.

Home equity line of credit (HELOC): A credit limit against which you can draw funds using checks or a credit card; you’ll pay back what you use plus interest, but often at a variable rate rather than a fixed rate of interest. 

Secured debt: A loan backed by an asset (like a home equity loan); typically offers lower interest rates and gives the lender the right to take the asset if you fall behind on your payments. 

Unsecured debt: A loan that’s not backed by an asset (like a traditional credit card); typically incurs a higher interest rate.

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This content is intended to provide general information and shouldn't be considered legal, tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.