The 3 Best Ways to Tap Into Your Home Equity
Since the Great Recession, the housing market has been on an unprecedented rise. According to Redfin, People who bought homes around the lowest point in the market in 2012 have now earned around $141,000 in home equity. That’s a 261% increase! Collectively, homeowners have accumulated a total of $203 billion, yet very few people are tapping into that record-breaking amount of unacknowledged wealth. The Federal Reserve cut interest rates for the second time this year, so now is a great time to reassess your borrowing options. In this post, we’ll go over a few of the best options to make use of the giant piggy bank that you might be currently living in.
Home Equity Line of Credit (HELOC)
A Home Equity Line of Credit, or HELOC, is a type of loan where the borrower is approved for a certain amount of funds, and the equity in the homeowner’s house is offered as collateral. This option is the most common because it offers quite a bit of flexibility and usually comes with no closing costs. Depending on the type of loan, there might not be any funds issued at closing. The borrower simply has the option to withdraw funds from the line of credit as they see fit, almost like a credit card. HELOC’s are most commonly used for major renovations, education, or medical bills. Savvy homeowners can find it quite lucrative to invest in improvements to the home in order to increase the value even more.
The important thing to remember here is that this type of loan is not recommended to be used for day-to-day expenses. Because of the underlying collateral of the loan, failure to repay may result in foreclosure of the home. So, it is especially important to be responsible with your purchases.
Home Equity Loan
These loans have the most structure and are commonly referred to as a “second mortgage”. They usually come with a fixed rate with a set term, although variable rate home equity loans are also available. Unlike HELOC’s, you cannot withdraw additional funds after closing. Both HELOC’s and Home Equity Loans are excellent options for homeowners because the interest rate on the new loan is often quite a bit lower than using a normal credit card.
A cash-out refinance is in a league of its own in that it will not involve taking out a second loan. With this option, the borrower refinances on their current mortgage for a higher amount and then takes the difference in cash. This will basically “reset” your loan and give you all the money you have paid towards your mortgage, plus any additional amount you choose to add to your new loan. This is a great option for those looking for a lump sum to pay for expenses, without taking out an additional loan.
If you are one of the lucky people who bought a home in the past 7 years and are sitting on some newly acquired equity, the decision of how to make the best use of it can be a daunting task. Hopefully, this article gave you the direction you needed in order to make an informed decision with that tremendous opportunity.