Are you seeing advertisements from lenders offering cash our refinances, HELOCs, fixed 2nd mortgages, unsecured bank loans? In 2018, home values are rising rapidly with the average increase from last year a hefty 7%.
Many areas have much faster increases in value than that. If you owe less on your home than it is worth, you have a major asset on your hands. It’s called equity.
With the equity in your home, you can take money out in a variety of ways to give you the cash you need for home renovations, buy a car, pay off debt and much more. It’s hardly a secret that homeowners have unique opportunities to obtain money by means of attractive loans with competitive interest rates.
Which way should you get the cash that you need, though?
Below is more information about the various ways to get cash out of your home.
A home equity loan is a second mortgage with a fixed interest rate and a specific payment term. You know exactly what your interest rate and term will be for the entire loan. When you are approved for a home equity loan, you get one lump sum of cash that consists of the available equity in your home. Most lenders allow you to take out up to 80% loan to value, minus what you owe. So, if you have a home that is appraised for $300,000 and you owe $200,000, you can take out up to 80% of the $300,000 minus the $200,000. So you can get a total of $40,000 in this example.
A home equity loan is a good choice for a person who has a big project or item they want to purchase all at once. It also is a good fit if you like to have a fixed interest rate with no surprises. Your rate may be higher than a home equity line of credit or HELOC, at least early in the loan period.
Note that if you take out either a home equity loan or a HELOC, you are putting your house on the line. If you do not pay the loan, you can lose your home.
A HELOC also is a second mortgage but it is different from a home equity loan. A HELOC has an adjustable rate that can go up or down over time. Most HELOCs have an interest only period for the first several years of the loan. So, your payment is lower, but you are not paying off principal at this point. Later, after the draw period on the loan has concluded, you will need to pay principal. And, the rate can change over time. We are currently in a generally rising interest rate market. So, it is possible that your HELOC could have a higher rate in a few years. The HELOC operates like a credit card with your equity being the credit line. You do not have to use all of the credit line at once. You only pay interest on whatever you have drawn out.
A HELOC may be a good choice if you have a project or need that needs money over time, such as a home renovation or the funding of a college education. A HELOC has more risk than a home equity loan as the interest rate can change.
Another way to get cash out of your home is to refinance your first mortgage and take cash out. Taking out your equity with a first mortgage refinance is similar to getting a second mortgage. The only difference is you are getting a new first mortgage and not adding a second one.
A cash out refinance can be the way to go if you have a higher interest rate than current market rates. However, in the rising interest rate market of 2018, fewer people are refinancing their first mortgages because fixed rate mortgages for 30 years have risen to approximately 4.7%. Many home owners who bought their homes in the past three to five years probably have rates lower than that. If you bought a home in 2016 and got a 30 year mortgage, you probably have a rate below 4%. It would not make sense to refinance your first mortgage in this situation. Getting a second mortgage makes more sense.
4. Unsecured Bank Loan
If you can’t or do not want to pull cash out of your home, another option is to apply for an unsecured loan from a bank. This can be a good way to go if you do not have enough equity in your property; most lenders will not do a second mortgage for less than $10,000. Other people may be uncomfortable taking equity out of their home.
These are the major ways that you can get the cash you need. Your home can be a good way to get low interest money to make home improvements, pay for college, buy a car, etc. Just remember when you take cash out of your home, you need to be able to pay that first or second mortgage, or you can lose the home.