3 Ways to Take Advantage of your Home’s Equity

Three common ways to take advantage of your equity;

 1.) Refinance with cash out

Refinancing with cash out involves taking out a new mortgage for the current value of your house to pay off your old mortgage and giving you “cash” back for the amount you have in equity. Most lenders require that you maintain a certain amount of equity in your home (usually up to 20% of the value). In rising interest rate environments, this type of loan is not as favorable as other home equity products because higher interest rates + higher mortgage means higher payments. Not to mention, if you obtained a mortgage in the last several years, there’s a good chance you already have a historically low-interest rate.

2.) Home equity loan

A home equity loan is a loan that is taken out against the equity you have in your home. In essence, your home is the collateral for the loan. The loan money is paid in one lump sum, usually has a fixed rate, and a fixed term for payback (usually 5-30 years). With the fixed amount borrowed, fixed rate and fixed term for payback, payments are the same each month throughout the life of the loan. Home equity loans are ideal for homeowners who have one big project or know up front the expenses that will need to be paid.

3.) Home equity line of credit (HELOC)

HELOCs are like home equity loans in the way the amount that could be borrowed is calculated. The main differences are that HELOCs most often have a variable rate, a dedicated draw period (the period of time, usually 5-10 years, where you can withdraw HELOC funds), and a dedicated repayment period (usually 10-15 years). With a HELOC, you withdraw money as you use it and pay interest only on the money borrowed (like a credit card). This type of loan is generally favored for homeowners who have multiple projects or needs that will occur over a span of time.  During the draw period, payments are usually interest-only payments and during the repayment period, payments are made on principal and interest. Because of the variable rate, possible fluctuations in the amount borrowed, and the differences in payments during draw and repayment periods, the monthly amount due varies.

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