Thanks to the major increase in home values over recent years, home equity in America has reached an all-time high of $11.5 trillion. While many homeowners leave their equity untapped as they pay off their mortgages, others withdraw equity when needed for home repairs and renovations, debt consolidation, college tuition, emergency expenses or large purchases. If you need extra funds, here are three ways you may be able to access your home’s equity.
A cash-out refinance involves replacing your current mortgage with a new one for a larger amount and receiving the difference in cash. For example, if you currently owe $200,000 on your mortgage and refinance into a $250,000 loan, you’d receive a one-time lump sum of $50,000. Because your entire loan balance will be refinanced into a new interest rate, this strategy is most favorable when you can obtain a lower rate in the process. Your new loan will be a standard first mortgage with a fixed or variable interest rate and must be repaid over a set period, such as 15 or 30 years.
Home equity loan
A home equity loan is a second mortgage in addition to your first mortgage. It will have a fixed or variable interest rate that is typically slightly higher than what is available for first mortgages. You will receive your second mortgage amount as a one-time lump sum, then it must be repaid like a regular mortgage over a set period, such as 15 or 30 years.
Home equity line of credit (HELOC)
A HELOC is a second mortgage with a revolving balance that functions similar to a credit card. This allows you to borrow what you need, pay it off and then borrow again. Like a credit card, a HELOC typically has a variable rate that fluctuates with the prime rate, but a HELOC’s rate is typically much lower than a credit card rate. Most HELOCs include a checkbook or credit card to access your funds, and you’ll only pay interest on what you withdraw. Unlike a cash-out refinance or home equity loan, a HELOC usually has no closing costs.
HELOCs are typically divided into a draw period followed by a repayment period. During the draw period, which is usually five to 10 years, funds can be withdrawn up to the credit limit and repaid at will, with interest-only payments required at a minimum. During the repayment period, the outstanding balance becomes a loan to be repaid with interest over a set period (typically 10 to 20 years), and further withdrawals can no longer be made.
Interest rates have risen over the course of the year, which means tapping your home equity may be one of the most affordable ways to borrow funds. If you’re interested in exploring your home equity options, please get in touch today.
Programs included in this article are subject to approval based on individual program guidelines and borrower’s credit and underwriting approval. Contact your Draper and Kramer Mortgage Corp. professional for full program details and requirements.