Prudent financial planning often involves taking stock of the various financial tools that may be available to you and sizing up the costs vs the benefits they provide.

It is in this pursuit that millions of homeowners have been considering taking out a home equity loan in 2022, as a confluence of events have made them both viable and accessible to many existing homeowners.

Home ownership comes with many perks, a fact that can be forgotten amid the annual expenses and time required to keep a home in good working order. Between insurance, taxes, maintenance, repairs, and renovations it can seem like a slog while in the middle of it.

But real value creation has been occurring through the process; this discussion deals with how to unlock some of the value you’ve gained even when you have no intent to sell your house.

Let’s review what home equity loans and lines of credit (HELOCs) are, how they can be utilized, and why the economic backdrop of 2022 makes them a viable consideration for many homeowners.

Understanding Home Equity Loans

At the outset of your mortgage, you made a down payment that represented the first slice of equity in your home.

In the time since, a portion of every mortgage payment has gone toward equity, with the other portion paying down the interest on your remaining loan balance. Your home equity (your home’s appraisal value minus what you still owe on your mortgage loan) has thus been methodically increasing over time, both from mortgage payments and from rapidly rising home prices over the past 12 years.

For example, if you owed another $200,000 on your mortgage and its current appraisal value was 375,000, you would have $175,000 of equity ($375,000 – $200,000 = $175,000).

A home equity loan is a secured loan that is backed by your accumulated home equity. A HELOC is the same kind of secured loan, but issued to you as a revolving line of credit, versus the lump sum payment of a home equity loan.

When approved for a home equity loan or HELOC, it is for a maximum amount that you can borrow. Typically you’ll need to have at least 20% equity in your home to get approval for either type of equity loan, as most lenders offer borrowing of up to 80% of your home’s total equity. Using the same example, a home valued at $375,000 could have a $300,000 max cap borrowed against it (0.8 * $375,000 = $300,000). For a homeowner with a remaining mortgage balance of $200,000, the bank could offer a max HELOC amount of $100,000.

Flexibility and Choice

When you want to access part of a HELOCs funds, you simply write a check or make a bank transfer against that maximum amount. Interest will only accrue on the amount you’ve used. It is not unlike how credit cards and credit lines work, except that the interest rate on HELOCs is much lower than for credit cards. The fact that your HELOC is backed with collateral is what allows this lower interest rate to be achieved.

Home equity loans are a sensible way to pay down higher-interest debt you currently have, and indeed it is one of the most common uses for HELOCs. Another standout use case is further improvements to your house; using funds in this way also allows most homeowners to make a tax deduction on their equity loan interest if the renovation makes a substantial improvement to the property.

In the initial phase of a HELOC, called the “draw phase”, you can borrow as little or as much as you want off the maximum amount. As with a credit card, you can also pay off as little or as much of the HELOC principle as you want. This draw period will vary but centers around 10 years.

When the draw period ends, the repayment period starts. From this point you can no longer borrow any more funds, you can only repay principal and the interest. This period lasts for typically 15-20 years. Any remaining balance owed at the end of the repayment period is paid as a balloon payment.

Home Equity Loans as a Cash Management Tool

One of the best aspects of HELOCs is their versatility. While many use the funds for home improvements, monies can be used for anything you need or want. Funds can be used to send a child to college, pay down credit card debt or medical bills- even to take a dream vacation. They can also serve as an emergency fund for one-time unexpected bills or life events – anything that might cause you to otherwise tap into higher-interest sources like credit cards or personal loans.

The utility of a home equity line of credit stands quite tall in 2022, as inflation has permeated through the national economy. Families face intensely rising costs for everything from medicine and food to cars and travel. Credit card interest rates are at their highest levels in years, making it vital to have access to lower-interest debt if given the chance. Materials for home projects have also seen high inflation, so using home equity loans for reinvesting back into the home provides excellent synergies.

When applying for a home equity loan, most customers prefer to lean on a trusted relationship they already have with their local community  bank. A loan officer can talk through all the options for using your funds, integrate transfers with existing accounts, and how to best structure terms to suit your unique situation. They can also help set you up for a home appraisal to assess the value of your home expediently and streamline the approval process.

Being able to access the gains in a generally illiquid asset is potentially a valuable tool for your and your family’s financial journey. Knowing that a line of credit or emergency fund is there for you – and at a below market interest rate – is also a compelling psychological edge for uncertain economic times.