PERSONAL BANKING White Paper Series. Using Your Home Equity Wisely

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1 White Paper Series Using Your Home Equity Wisely October 2013

2 If certain television commercials can be believed, your home s equity is the key to achieving all your wildest dreams. Simply tap in to that wondrous pool of money and life is good, right? Not exactly. Home equity is a powerful tool. And like any powerful tool, it can be used wisely or not-so wisely. In this guide, we ll explain what home equity is, how it s calculated, and what you can do to use it responsibly. But as with any investment, it pays to follow a solid strategy.

3 Part 1 What is home equity, how is it calculated, and why should I care? Simply put, equity is the value you ve built up in your home. And in theory, calculating home equity is fairly simple. Just subtract the amount you owe from what it s worth. So if your home is worth $150,000 and you owe $100,000, you ve built $50,000 in equity. Of course, in the real world, it s not always that simple. While it s easy to determine how much you owe on your home, it can be difficult to calculate how much it s actually worth. That s because home values change. Fluctuations in the economy, home improvements, and local real estate trends will all have a hand in the value of your home. - Wondering how much equity you ve built up? Just fill in the blanks. My Home s Approximate Value Amount Owed on My Home My Estimated Home Equity Before a bank issues any sort of home equity product, they ll likely order an assessment of your home. An assessment is a process that helps determine the value of a property. Some assessments require actual in-home visits and property inspections. Others are calculated using data available through online databases (such as sales prices of similar properties).

4 Part 2 Line vs Loan. There is a difference. They re often discussed in the same breath, but loans and lines of credit are really two unique products. And while they re both tied into your home s equity, they work in very different ways. With a home equity loan, you ll receive your money in one lump sum. You ll also have set monthly payments for the life of the loan. So on the whole, it s similar to a car loan or other term loans you ve probably had in the past. A home equity line of credit (or HELOC ) works a little differently. Your bank will issue a credit amount that you re able to tap into when, and if, you need it. In this way, a HELOC is a kin to a credit card you have a credit line, but you don t necessarily want to go out and use it all. Pros Cons Home Equity Loan Generally available with a fixed interest rate, so you ll avoid payment increases down the road. Usually available with lower interest rates than credit cards. Can allow you to consolidate multiple debts into a single, low interest payment. Depending on how it s used, it may be tax-deductible. Talk to your accountant for details. Because it comes in a lump sum, you ll pay interest on the entire amount you borrow. Home Equity Line of Credit You can borrow money as you need it. In doing so, you avoid taking on a large amount of debt all at once. It s an ideal emergency fund if you have the discipline not to tap into it unnecessarily. Many lenders will allow you to convert variable rate HELOCS into fixed rate loans. As with home equity loans, the funds you borrow may be tax deductible. Talk to your accountant for details. The interest rate will most likely be variable, so payments could spike. Could cause your net worth to drop, especially if you use the funds to purchase items that depreciate (cars, boats, etc). Requires the discipline not to use funds unwisely. Otherwise your debt can get out of hand. If you don t make the payments, you could lose your home. If you don t make the payments, you could lose your home.

5 Part 3 It s the roof over your head. Don t game with it. Remember, home equity loans and lines of credit are essentially second mortgages. If you fail to make scheduled payments, you risk losing your home. Before you leverage your home s equity, ask yourself if it s worth it. Uses of Your Home Equity Wise Uses of Home Equity: Debt Consolidation Home Improvements Medical Bills Unwise Uses of Home Equity: Expensive Toys (boats, motorhomes, etc) Extravagant Vacations Impulse Purchases and Shopping Sprees Home Furnishings (or other items you could save for) Like pretty much every other financial product available today, home equity loans and lines of credit aren t inherently good or bad. It s all about how you use them. If you make wise decisions, you ll be enjoying the benefits of your home equity product for years to come.