One of the greatest advantages to homeownership is the ability to build equity over time. You then have the ability to use that equity in the form of either a one-time home equity loan or a home equity line of credit (HELOC). Whether you are interested in making improvements to your home, paying off debt, or starting a college fund for your children, accessing the equity in your home can be a beneficial option to obtain financial flexibility. The three most common ways to access the equity you have in your home are cash-out refinance, home equity loans, and home equity lines of credit.
With a cash-out refinance, you are effectively taking out a loan with an amount greater than your current mortgage while keeping the difference for your own personal use. With this method, you refinance any existing mortgages and extract additional equity. You will have one monthly mortgage payment, and the interest charged on this loan is tax deductible.
A home equity loan allows you to borrow against the equity you have in your home. This loan is based on the difference between your mortgage balance due and your home’s current market value. Usually, this “second mortgage” has a fixed interest rate, and you receive the money as a lump sum with payments amortized over the term of the loan. The rates are often higher on a home equity loan than a home equity line of credit because you are receiving the security of a fixed rate. With this loan, you will have multiple monthly mortgage payments (one on the existing first mortgage and one on the new second mortgage), but the rates will remain the same throughout the term of the loans.
A HELOC is a more flexible way to receive funds over time instead of in one lump sum. HELOCs function like a large credit card using the equity that has already been paid into your home. While the initial interest rate is often lower than a cash-out refinance or home equity loan, the rate on a HELOC is variable and can go up and down over time. However, you can draw money from the credit line when needed and only pay interest on the outstanding balance.
When determining which home equity loan may be right for you, ask yourself whether you need a lump sum of cash at once or access to a reserve of cash over a longer period of time. Another thing to consider is how much you are willing to pay in closing costs to achieve these goals. Call me today to set up an appointment! I would love to review your finances and help you determine if a home equity loan is right for you.
