Many Americans have most of their wealth in the value or equity of their home. That's why it's no surprise that many people have questions about how to tap into their home equity. In fact, there are several different ways to do this so we've compiled a list to help you better understand your options.
Home equity loans, also known as HELOC or home equity line of credit are popular loans that give the homeowner a 2nd mortgage lien. This means their first mortgage is left alone and the new HELOC loan is opened as a second mortgage. This loan will give a loan amount, for example $100,000, and allow the borrower to use the line as they need it.
You can also repay the loan and re-borrower the money several times during the draw period using it like a revolving account or credit card.
Most HELOCs have an initial draw period of 10 years, meaning that you can borrow, repay and borrow again during that time. Once the loan reaches 10 years it turns into an amortized loan requiring the borrower to repay the loan over a set number of years and the money can no longer be accessed or re-borrowed.
Some things to consider with HELOC loans: the payments are usually interest-only during the draw period. The rates are generally adjustable from day one, meaning the payment can change based on the terms and index the rate is tied to.
You can only take money from the line for the first 10 years, then any remaining balance goes into a fixed payment over a set number of years. Using a home equity loan calculator will help homeowners understand what a loan would cost them monthly based on their individual needs.
Second mortgage loans are simply a mortgage that is a second lien on your home for a set amount of money and time. Many lenders will give a term of 15 years or less with fixed or adjustable rates for the repayment period. The total loan amount is given to the borrower at closing and the repayment period begins right away.
Some things to consider with a second mortgage: rates are higher as the risk to a lender is greater. This is because they are taking a second lien position to your first mortgage. In addition, the funds must be disbursed to the borrower at closing. And lastly, repayment terms are usually shorter than a fixed rate 1st mortgage or HELOC.
A cash-out refinance involves completing a loan that pays off the current first mortgage and adds additional money to the loan amount beyond what is owed. The remaining balance is cash out that the borrower receives at closing.
Something to consider when looking at this option is that you have one loan with one monthly payment. This is an amortized loan with a fixed number of payments that include both the principal and interest.
Additionally, this option also pays off any current mortgage if one exists and the remaining cash goes back to the borrower.
The last but obvious way to access your home equity would be to sell the house and pay off any existing liens resulting in the remaining amount going to the seller.
CPF Mortgage is a family-owned and operated independent mortgage company and broker that provides expert home-financing support and devoted customer service. To learn more about which option works best for you, please feel free to reach out to us. We'd love to help!