Home Equity Loans—What You Need to Know
Let’s talk home equity.
As we navigate the complex world of home financing, it’s important to know exactly what the term means, and how it relates to you. Here’s a basic definition as it pertains to the homeowner:
Equity is the difference between how much your home is worth and how much you owe on it. For example, if your home is worth $150,000 and you owe $100,000 on your mortgage, then you have $50,000 worth of equity in your home. This number, known as the loan-to-value ratio [LTV], will rise with the property value and amount of money put towards the mortgage over time.
So, how can this home equity help you?
One day you may need access to immediate cash, and there may not be enough in your bank account to cover those needs. That’s where your home equity comes in, as you’ll be looking at one of three options:
Home Equity Loan
Sometimes referred to as a second mortgage, home equity loans are paid to you as a lump sum based on the value of your property. These loans are offered at a fixed amount with a fixed interest rate, and must be repaid over a set period of time.
Home Equity Line of Credit, also known as HELOC
HELOCs are a hybrid between home equity loans (above) and a credit card. They provide you with a line of credit related directly to your home equity that you can access to make purchases.
As with credit cards, there’s a limit to a borrower’s funds (related to their home equity), and the borrower pays interest on any payments until they are paid back. But unlike credit cards, the average HELOC interest rate is often under 5%, depending on FICO score and the amount borrowed, so the borrowed amount is easier to pay back.
Cash Out Refinancing
A cash-out refinance is an opportunity to transform your current equity into cash. This equity is calculated from two sources: The amount you’ve built up by paying your current mortgage, plus a new, appraised value of your home. There’s no need to take out the full equity, though it is an option if warranted for your situation. You have the power to choose how big or small (depending on the equity established) the amount.
Speaking of options, cash out refinancing has assisted many homeowners in remodeling, paying off bills and other home and life improvements. Perhaps it could for you, too.
As with any mortgage, the fees and interest rates vary according to each homeowner, so considering long-term goals and monthly payment amounts is crucial to choosing this option.
Regardless of how you decide to use your home equity, it’s important to think carefully about what’s ideal for your financial situation. For more information on home equity, or to begin your journey into homeownership, contact one of Open Mortgage’s friendly loan originators.