Our home is our personal space to just be us. We get to host friends, have meals, hang out and rest our heads at night. So a home has a certain intrinsic value. You also spent a ton of money to get your home, and that makes it a huge investment opportunity. Every time you make a payment, you gain equity in your home. Your equity grows even faster in an environment where home values are rising, as they are now.
That equity can be converted into cash to unlock the true investment potential of your home. It can be used to pay off home improvements, augment a college fund or give your retirement funda boost. Let’s go over some option for making your equity work for you!
Home Equity Loans
Home equity loans can come with either fixed or adjustable rates. They come with slightly higher rates than home equity lines of credit. These allow you to take advantage of the home equity you’ve currently built up by taking out a second mortgage against your existing home equity – the amount of your loan that’s currently paid off – in order to make home improvements, for example. There may be limits set by lenders or investors in the loan regarding how much of this existing equity you can take a loan against.
The upside to this is that you have the option to go with a fixed payment. That way, your payment never changes and you know what you’re getting. There are downsides. With home equity loans, in addition to having higher rates than HELOCs, you’re going to pay a higher rate than you would if it were your first mortgage since home equity loans are a second mortgage.
The reasoning for this is that lenders assume that you’re going to make the payment on your primary mortgage first. The lender that made the home equity loan also gets a lien on your house, but the primary lender’s lien takes precedence. In exchange for the additional risk, the lender on the second mortgage will charge you more.
Home Equity Lines of Credit
HELOCs offer lower rates than home equity loans. Before looking at a HELOC, there are some things you should think about.
For starters, HELOCs come with adjustable rates. That means the rate stays fixed for a certain period of time and then adjusts up or down based on market conditions for the remainder of the loan term. If you’re looking for payment certainly, this may not be the option for you.
You should also be careful when looking at the terms of the loan. HELOCs have a draw period and a repayment period. When you take out a HELOC, you have the ability to draw on the accumulated home equity for a certain period of time. During this tie, you only pay interest on the equity you use. Sometimes this is the only payment you make during the draw period as you may not be required to make any payments toward principal during this time.
Cash-Out Refinance
Every situation is different, so we always recommend talking to a financial advisor. In many cases, however, the best option for utilizing your home equity is going to be a cash-out refinance. It features all the benefits of the other two options but also has a couple of key changes.
