Breaking the Home Equity Piggybank

For the vast majority of people “home sweet home” is their most valuable asset. Borrowing against a home can free up cash for many purposes that would otherwise be out of reach. Enter home equity loans and home equity lines of credit (HELOCs), both ways to access home equity without the homeowner having to sell. Home equity loans and HELOCs are essentially second mortgages that are secured by the home as collateral.

To calculate equity, subtract the amount you owe on your mortgage from your current property value. Generally, lenders will let you borrow up to 85% of your home equity, depending on your credit score and history, employment history, and monthly income and monthly debts. However, if you default on payments for either a home equity loan or a HELOC, the lender can foreclose on the property. That said, tapping into your home equity can be a sound strategy to raise cash for large purchases if and when you need it.

The rundown on home equity loans:

  • Lump sum
  • Fixed interest rate
  • Conventional loan structure separated into interest and principal
  • Monthly payments are predictable and don’t change.
  • Monthly payments are for a set period.
  • Monthly payments are made in addition to mortgage payments.

The rundown on home equity lines of credit:

  • Revolving credit line, money is withdrawn as needed (like a credit card).
  • Variable interest rate often begins at lower rate than home equity loans.
  • Conventional loan structure separated into interest and principal or interest-only payments
  • Monthly payments adjust up or down based on a benchmark interest rate.
  • Rising interest rates can increase payment.
  • You only pay interest on the money you withdraw, not the total credit available.
  • Some lenders allow partial or full conversion to fixed rate home equity loans.
  • The typical borrowing period is 10 years followed by a repayment period of 10 or 20 years.
  • During the borrowing period, you have to make minimum monthly payments on the amount you owe..
  • Once the borrowing period ends, you have to repay the remaining balance, like a conventional loan..
  • Interest may be tax-deductible.
  • You can make additional principal payments.
  • You can refinance.

Which option is right for you? Home equity loans could potentially be better for people who have an upcoming one-time expense with a known cost. For example, this might include home improvement projects, a down payment on another property, wedding expenses, emergency expenses, even credit card debt consolation. Home equity loans could also benefit people who want to avoid overspending. On the other hand, HELOCs could potentially be better for people who have upcoming variable or periodic expenses and would benefit from access to a revolving line of credit. For example, this might include home improvement projects, college expenses, medical bills, long-term care expenses, or a new business venture. As with most financial planning questions, the answer to this question depends on each homeowner’s unique circumstances, so this is a great question to discuss with a financial advisor.

Banking on Success: The Microfinance Movement

Did you know that over 1.7 billion people worldwide do not have a bank account with a financial institution? (World Bank Global Findex Database 2017) The vast majority of these unbanked people live in the developing world, and overwhelming evidence demonstrates the positive correlation between financial inclusion and development. Without access to financial services, unemployed or low-income people are far worse off. Cash can be hard to manage, loans from family, friends, and loan sharks can come at a high cost, and the ability to manage financial emergencies can be severely compromised.

Microfinance addresses this basic unmet need. The goal of microfinance is to provide people who are typically excluded from the traditional banking system access to it, in the form of savings accounts, individual and group loans, agricultural loans that can be paid back when the harvest comes in, insurance, and education, among other services. These small working capital loans are also known as microloans or microcredit. Microloans do not require collateral, and can be distributed in small amounts and paid back over long terms. Like conventional lenders, microfinance lenders charge an interest rate and establish a repayment schedule. However, there is no profit motive.

What is the global reach of the microfinance movement? In 2018 $124 billion was distributed to 140 million borrowers, of which 80% were women and 65% were rural borrowers, and it is growing every year. (Microfinance Barometer 2019) With cash infusions from microfinance programs the data shows that borrowers are better able to feed their families, send their children to school, improve their homes, reinvest in their businesses, leave farming and become entrepreneurs, and put money aside for savings goals or to serve as an emergency fund.

The impact of technological innovation in this space cannot be overstated. With increasing ownership of cell phones and access to the internet in the developing world, the fast-growing fintech industry is better able to deliver financial platforms to rural populations. These software applications remove old obstacles and create new efficiencies. For example, the ability to make digital payments or send money transfers can eliminate travel time and cost, administrative work, and also reduce corruption.

Above and beyond financial inclusion, microfinance organizations seek to promote self-sufficiency and economic justice for underserved populations. In a global pandemic our struggles are amplified and this message resonates more than ever. To find out more, check out the crowdfunding site Kiva (I have no affiliation) to see how one of the largest and most well-regarded microfinance organizations embodies this spirit.