Tapping into your home’s equity can be a good way to access cash quickly to pay for renovations or improve your financial position. But, it’s important to understand the process. Common options for accessing your home’s equity include a cash-out refinance, a home equity loan, or a home equity line of credit (HELOC), each of which can be used to cover everything from home improvements to debt consolidation, college costs, and even emergency expenses. Here we explain to you the differences between each loan scenario:
Cash-Out Refinancing creates a new, larger mortgage on your home. You’ll use this mortgage to pay off your old one and take out the difference in cash.
HELOAN Or Home Equity Loan, you get a lump sum of cash that you must begin repaying immediately. Home equity loans have fixed interest rates, meaning your payments will be the same every month.
HELOC is a variable rate home equity loan that works like a credit card. With a HELOC, you’re given a line of credit that’s available for a predetermined time frame. During this “draw period,” which usually lasts around 10 years, you can use the money as needed. After the draw period expires, you must begin repaying whatever you borrowed over the next 10 to 20 years.
Reasons To Tap Into Your Home Equity:
- Home Renovations Or Improvements: Home improvement is one of the most common reasons homeowners take out home equity loans or HELOCs. Besides making a home more comfortable for you, upgrades could raise the home’s value and draw more interest from prospective buyers when you sell it later on.
- College Tuition and Expenses: Using a HELOAN or HELOC may be a good way to fund college tuition and/or help cover all of those incidental expenses associated with college. The benefit is mainly due to lower interest rates with home equity loans versus rates for student loans. However, before tapping into your home’s equity, look at all the options for student loans, including the terms and interest rates. Also, if you want to fund your child’s education with a home equity loan product, be sure to calculate the monthly payments during the amortization period and determine whether you can pay off this debt before retirement.
- Debt Consolidation: Credit cards typically have higher interest rates than other loan options, which can make paying off a high balance quite costly if you can’t pay down the debt within a couple of months. Using a home equity loan with a lower interest rate to pay off a high balance or consolidate credit card debt can be a good option. However, it’s crucial that you budget carefully for this loan payment since late payments or a default on the loan could lead to credit issues or the possible loss of your home. If you need to consolidate debt due to financial challenges, it might be worthwhile to seek professional advice to establish a plan to help you manage your finances.
- Emergency Expenses: The standard recommendation is to have an emergency fund to cover three to six months of living expenses for crisis situations. But sometimes, that fund might not be enough to help you stay afloat if you suddenly find yourself in a tough situation. Perhaps you’re out of work longer than expected or have incurred extensive medical bills. In these instances, a home equity loan may be a smart way to supplement your emergency fund.
- Long-term investments: Some homeowners use home equity to invest in the stock market or real estate, expecting the returns to exceed the cost of a home equity loan.
Whether you use your home equity to add value to your home, pay off debt, or to better your financial position, be sure to go over the numbers. Ensure you can continue to pay your regular mortgage on top of a new home equity loan or line of credit. To get started, simply apply online today.
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Source: Bank Rate.